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THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
6
‘There can be no vision of the future, but there can and must be a vision for the future: a new barbarian vision.’
‘A future that isn't there yet can't be discovered.
It is created by men and women of vision, who are faced with the simple choice: to create their own future, or fall into somebody else's (and) be at the mercy of another's whim.’
The New Barbarian Manifesto - How to survive the Information Age 2000 Ian Angell
FUTURE
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
12
The Impact of the Highly Improbable- The Black Swan -
Nassim Nicholas Taleb (NNT) draws together a large number of references and anecdotes to illustrate his points. He repeatedly attacks the received wisdom of those who model the future and who, being lulled into a false sense of security by the elegant mathematics of their models, are repeatedly surprised when the future does not adhere to their script.In essence NNT persuades the reader that the most impactful social and technological changes – the changes that will drastically alter the course of future history - cannot be predicted since they are ‘unknown unknowns’. Such events –which he calls Black Swans – will happen for the first time so cannot be imagined in advance, and cannot be predicted by models that extrapolate forward the past. The past cannot be a basis on which to predict the future; ask any turkey just before the butcher’s cleaver falls if he thought his today would be any different from the preceding 1000 days when he ate heartily and potted around a garden or dozed in the sunshine….
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
26
Credit ManagementThe traditional view of credit management is associated with ‘sales prevention’ and ‘collections’. In this view credit controllers are charged with minimizing credit risk, minimizing days sales outstanding (DSO), and sorting out invoice disputes.
However there is a more positive approach to corporate credit management, which perceives credit management in two steps; first the strategic decision to grant credit or not, and second the payment risk mitigation activity. Consequently in the modern view granting credit is a function of a company’s strategic self-interest alone.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
29
What happened to ‘Cash is King’?There are five strategic reasons to grant credit. If none of these drivers is applicable then a company is well advised to ‘sell for cash!’
One or more of these should be identified as the driver for any decision to grant credit to buyers.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
32
Comparative Cost of MoneyIf a supplier company has a credit rating superior to that of its
customer, the cost of the capital it must utilize to finance ‘supplier credit’ will be lower than the cost of funds its buyer would have to
borrow in order to pay promptly.
Therefore a win-win opportunity arises.
In such a case the supplier could offer credit terms sufficient to cover the period required by the buyer to sell the goods supplied, and collect funds from the ultimate consumers. Hence the buyer would not have to borrow funds, avoiding bank interest costs, while the supplier would incur a comparatively low cost of funds. The net saving (as a result of a higher achievable price) could be retained by the seller, or shared
between seller and buyer, through a price adjustment.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
33
Administrative EfficiencyIn many cases the cost of collecting cash in advance, in respect of
many relatively small orders, will outweigh the risk of granting credit terms to an extent sufficient to allow monthly billing. In others the cost of issuing and administering numerous invoices will drive a decision to
grant credit. Comparative storage costs can also be an important consideration, in respect of this strategy. Manufacturers of agricultural fertilizer, for example, find it is cheaper to deliver fertilizer to farmers
throughout the year rather than only delivering it just prior to the time it is needed. Farmer customers each build stocks of fertilizer close to
their fields prior to use, instead of the manufacturer accumulating huge stockpiles remotely, and then delivering supplies to numerous farmers over a short period. The manufacturer reduces storage and transport
costs in this way.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
34
Building TrustCredit is an excellent means through which to build trust into a seller-buyer relationship. Trust in the quality of the
product and trust in the supplier’s ‘after-sales’ service offer. Providing credit enables a seller to signal to a
buyer that it has every confidence that the product will perform as promised, and that it wants to establish a long term relationship with the buyer. It also encourages the buyer to believe that the seller will not ignore any needs
that the buyer may have for repair or replacement of faulty product after delivery.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
35
Business DevelopmentIn cases where a supplier wishes to assist a distributor (usually in an emerging market) to grow its business more quickly than the
distributor’s own financial resources would normally allow, ‘supplier credit’ is a useful strategic tool.
Extended supplier credit will allow a distributor to recycle sales revenues collected (cash) within its domestic operations; to meet fixed expenses, finance its own receivables, and build necessary
infrastructure.
Naturally an arrangement such as this would have to be closely managed, and calls for a high degree of trust on the supplier’s side
and transparency on the distributor’s side.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
But what is the limit?
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Double, double toil and trouble; Fire burn, and caldron bubble. Fillet of a fenny snake, In the caldron boil and bake; Eye of newt, and toe of frog ...
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
43
The ‘cash flow cycle’ is the time required to convert goods into cash; from the date the company pays the costs of acquisition of the goods to the date of receipt of the
cash from related sales.
- DAYS PAYABLES + DSO
+ DAYS INVENTORY
PAYMEN
T TERM
S & LIM
ITSPAYM
ENT
TER
MS
& L
IMIT
S
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
47
When the scale of Parmalat’s problems emerged, Standard & Poor’s was forced to downgrade the company’s stock from investment grade by eight notches, later abandoning a rating altogether. Investors are wondering if the agency’s other ratings are now to be trusted. The credit-rating industry … suffered a damaging blow to its credibility. *
* The Sunday Times on January 4 2004
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
50
There can be no vision of the future, but there can and must be a vision for the future: a new barbarian vision.
A future that isn't there yet can't be discovered. It is created by men and women of vision, who are faced with the simple choice: to create their own future, or fall into somebody else's (and) be at the mercy of another's whim.
The New Barbarian Manifesto - How to survive the Information Age 2000 Ian Angell
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
We now stand on the threshold of a new age – the age of revolution. In our minds we know the new age has already arrived; in our bellies, we’re not sure we
like it. For we know it is going to be an age of upheaval, of tumult, of fortunes made and unmade at
head-snapping speed.
For change has changed. No longer is it additive. No longer does it move in a straight line. In the twenty-first
century, change is discontinuous, abrupt, seditious.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
61
Scenario planning derives from the observation that, given the impossibility of knowing precisely how the future will play out, a good decision or strategy to adopt is one that plays out well across several possible futures. To find that robust strategy, scenarios are created in plural, such that each scenario diverges markedly from the others.
These sets of scenarios are, essentially, specially constructed stories about the future, each one modelling a distinct, plausible world in which we might someday have to live and work.*
* How to Build Scenarios – Lawrence Wilkinson 1994-98 Wired Digital Inc.
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
66
DisclaimerJust to emphasise that the opinions, ideas and suggestions expressed throughout this presentation are mine alone. In making this presentation I do not represent any other organisation, my employer, or any other person.
This presentation is simply a sharing of ideas with a view to stimulating a debate, which may lead to the widespread adoption of a holistic, future-oriented approach to counterparty risk management.
Ron Wells
THE PUBLISHER OF ‘GLOBAL CREDIT MANAGEMENT – AN EXECUTIVE SUMMARY’ IN THE CHINESE LANGUAGE
Sponsored by: The International Trading Institute @ SMU (ITI)
67
Ron Wells is the author of Global Credit Management, an Executive Summary published by John Wiley & Sons. This concise work describes the essence of effective credit management, which too often is a passive and reactive discipline within a company. It includes practical guidance to equip a reader with the basic tools necessary to establish a holistic credit management discipline within a business.The Mandarin Chinese (simplified characters) version of Global Credit Management was published in July 2007, titled Huan Xin Ping Heng Biao Shang De Shui Shi – Awaken the Sleeping Lion on the Balance Sheet. See www.t3plimited.com (Chinese version: www.t3plimited.net) for details.Ron maintains a free access, credit management resources web site at: www.BarrettWells.co.uk. He has delivered numerous presentations relating to credit and performance risk management, and taught several classes in related subjects; see www.barrettwells.com for details. Ron is a Certified Credit Executive (CCE), a Chartered Management Accountant (ACMA), a qualified International Banker (ACIB) and a Chartered Corporate Secretary (FCIS). He participated in the NACM Graduate School for Credit and Financial Management in 1996/97, passed with distinction and was elected Best Student.Ron joined Cargill International Trading in Singapore as Asia Credit Manager for Energy, Transportation and Industry in February 2011. He was Vice President - Credit Risk Management of RBS Sempra Commodities in London from October 2007, and became Executive Director of Counterparty Risk Analysis and Portfolio Management EMEA, when J.P. Morgan’s Global Commodities Group purchased RBS Sempra on July 1, 2010. Previously Ron was Credit Manager for Global Supply & Trading with Chevron Corporation for 16 years. Ron earlier worked for various companies and commercial banks becoming a specialist in financial analysis, corporate credit management, trade operations management and trade finance-related marketing.