Money Manager's Memo...

Behind every successful company are managers counting the stash, ensuring the cash flow is correct. Bringing in the Benjies.. capish?..Who supplies the linen? What is the state of the supplier? Will they go bankrupt after our $50,000 payment for deliveries for the next 6 months? Someone has to be the accountant, turn here...                

Cash in advance:  This is common where each side is unfamiliar with the other, and where there is no relationship possibility, or necessity. Or where the reputation of one party is suspect. The seller in this case will receive payment before the shipment is set on its way and has already recovered the costs for shipment and delivery. The buyer accepts responsibility upon receipt.

2                    Open Account:  In this type of arrangement, the seller assumes all of the risks and this usually occurs when dealing with established customers. Here both parties agree the health of each other is secure enough to carry an open relationship.

3                    Consignment: In this type of deal, the seller assumes all of the risk and payment from the buyer occurs after the goods have been sold to consumers. The buyer assumes responsibility upon receipt of the goods.

4                    Letters of Credit: (also involving international trade) In a letter of credit arrangement, the buyer’s bank will issue a letter promising payment pending any conditions set out in said letter. If a confirmed letter of credit is issued, a corresponding bank in the seller’s country will accept the issuing bank’s letter and honor it with payment. If the letter of credit is not confirmed by a bank in the seller’s country, the issuing bank retains payment responsibility.

If the risks are not sufficient to warrant payment before shipment, sellers may opt for drafts, which are an unconditional orders requesting payment on delivery- termed sight drafts, or at a set date- time drafts. The buyer accepts the risks upon receipt of the goods and a draft does not guarantee payment by the buyer. This is a major drawback of documentary drafts.