Multinational Corporations and Accounts Receivable Management

Multinational Corporations (MNC’s) grant trade credit to customers, both domestically and internationally, because they expect the investment in receivables to be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. Some companies also earn a profit on the financing charges they levy on credit sales.

The need to scrutinize credit terms is particularly important in countries experiencing rapid rates of inflation. The incentive for customers to defer payment, liquidating their debts with less valuable money in the future, is great. Furthermore, credit standards abroad are often more relaxed than in the home market, especially in countries lacking alternative sources of credit for small customers. To remain competitive, MNCs may feel compelled to loosen their own credit standards. Finally, the compensation system in many companies tends to reward higher sales more than it penalizes an increased investment in accounts receivable. Local managers frequently have an incentive to expand sales even if the MNC overall does not benefit. Two key credit decisions to be made by a firm selling abroad are the amount of credit to extend and the currency in which credit sales are to be billed.

The following five-step approach enables a firm to compare the expected benefits and costs associated with extending credit internationally:

  1. Calculate the current cost of extending credit.
  2. Calculate the cost of extending credit under the revised credit policy.
  3. Using the information from steps 1 and 2, calculate incremental credit costs under the revised credit policy.
  4. Ignoring credit costs, calculate incremental profits under the new credit policy.
  5. If, and only if, incremental profits exceed incremental credit costs, select the new credit policy.

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