Chapter 3 Understanding trade
The concept of trade
Irrespective of their field of activity, all
companies act at some point or another as
both a buyer and a seller. Every company
relies to a certain extent on supplies, whether
in the form of raw materials, machinery, semi-
finished goods or a final product. At the same
time, all companies need to sell their goods
or services, in order to realise cash from that
investment. Both when sourcing supplies
and when selling the products, a company
is exposed to risk. Such risks cannot be
avoided if a company is to continue to
transact, and still greater risks must be taken
if a company is to grow.
The challenge for all companies is
to understand the risks inherent in any
transaction, so that they can be managed as
necessary. The treasurer’s skill in evaluating
risk is central to any management of working
capital finance.
From the seller’s perspective, there are
two core risks associated with any trade:
Does the company have the necessary
resources to fulfil the sales contract?
The treasurer’s responsibility is to ensure
that the company has the financing in
place to allow all necessary procurement
to take place, to fund production and then
to cover the cost of holding inventory and
finished stock until such time as cash is
collected from the customer.
Will the customer pay according to the
terms agreed?
The second core responsibility is to
support the accounts receivable team in
collecting payment from the customer. To
be most effective, this should start from
the point at which a transaction is being
negotiated, as the treasurer will have skills
to evaluate counterparty risk, through
to providing advice on the preparation
and delivery of documentation, and then
collecting payment through the company’s
bank account and liquidity management
structures.
From the buyer’s perspective, there are also
two core risks: Will the supplier deliver the goods or
service to the standard agreed in the
contract?
Any disruption to the company’s
production process is likely to be costly,
in terms of both potential lost sales and
idle capacity. Just as with evaluating the
counterparty risk posed by customers,
the treasurer has a role to play in helping
to evaluate the financial strength of the
company’s suppliers. Does the buyer have the finance in place
to meet its obligations as a result?
The treasurer’s second task is to ensure
the company has the means to meet
its obligations according to the terms of
the transaction. This may include, for
example, evaluating any reduction in price
in return for early payment.Domestic
For a variety of reasons, ranging from ease
of logistics, familiarity with customs and legal
procedures, as well as many consumers’
desire to support domestic companies, the
majority of sales made by most companies
are domestic (within country, rather than
cross-border) transactions. It is important
for treasurers to recognise this, as trade
finance techniques are equally applicable to