Risks Analysis for Checks and Letters of Credit Report

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In the previous reports the information presented provided our reader with a risk analysis plan for BGP technologies an international bio technology firm. In this report the information presented will assist the reader in identifying risk avoidance strategies for checks and letters of credit. In this era of online money transfers an international business entity such as BGP can easily find itself facing serious litigation from external entities. In addition to that the Company may also easily make losses through sale of goods and non receipt of funds.

Among the methods that the Company can utilize in avoiding such issues include letters of credit and checks. A letter of credit is a legal document that is prepared by a financial institution that guarantees the payment of a certain amount of money in exchange for goods or services (Pride, Hughes & Kapoor, 2009). With this therefore, the Company can continue to do business with partners who may be located in remote locations. This facility will also ensure that the company is not prone to litigation for non payment or late payment. This is mainly because a letter of credit allows the Company to state terms to be satisfied prior to payment such as number of goods, condition, date of receipt, etc (Pride, Hughes & Kapoor, 2009).

On the other hand the Company may also choose to use a banker’s acceptance for payments. However a banker’s acceptance is an instruction to pay a specified entity an amount of money on a certain date. Though this option provides convenience it is ill suited for international business owing to the risks associated. This option does not offer provisions to deal with issues such as goods received in poor condition or late which may require adjustment to the amount paid. Given that this option does not allow for conditions to be specified it places the company in a risky position (Pride, Hughes & Kapoor, 2009).

In drafting a letter of credit often an external intermediary maybe involved. The purpose of the intermediary is to clarify the terms that govern the payment since this document alone serves as the basis for payment. It is therefore advisable to ensure that all essential aspects are given due consideration (Hinkelman et al., 2005). For example, it should be stated clearly whether payments are to be made 30days after loading goods or after delivery, whether payments are to be made in local currency or in international currency. It is for this reason an external intermediary is required to assist by providing information on local and international banking regulations as well as assist in structuring the document (Hinkelman et al., 2005).

A letter of credit may be revocable or irrevocable and in the case of BGP an irrevocable letter of credit is recommended (Hinkelman et al., 2005). Based on this statement it become clear that in this mode of payment the document is more important than the goods and payment is only made when the goods and all documentation match the laid down specifications. This stringent measure provides much needed security for the Company. The party requesting the document is liable to pay a percentage of the amount for the document and further payments are required to make any further amendments (Hinkelman et al., 2005). The payment is also not usually made until the funds are received by the paying bank. To speed up this process electronic funds transfer may be used to ensure speedier completion of the transaction.

As an alternative to the above mode of payment the Company may also on occasion resort to the use of a cheque to pay for goods or services. A cheque can be used to instruct a bank to pay an amount to money to the payee. Unfortunately, this mode of payment if not properly used can place the Company at risk and even cause the Company credit rating to decline. The reason for this is based on the possibility of lack of accuracy between the bank statement and the Company cash book. The cash book indicates the internal financial position of the Company whereas the balance statement indicates the financial position at a particular date (Cowan & Russel-Jones, 2005).

The risk that this poses is due to the fact that on any day the bank statement may reflect a wrong position due to the fact that there are numerous cheques and funds transfers still being processed. In the event that the Company issues a cheque without a proper internal control procedure it is very likely that the cheque can bounce. When a cheque is not paid the relationship between the Company and the payee is strained and may lead to legal action (Cowan & Russel-Jones, 2005).

This suggests that to avoid such risks it is essential that the Company have an internal system that is used to calculate the total amounts received and paid on a given day. This will allow the Company to make payments that it can honor and avoid any legal issues that may arise in the process (Cowan & Russel-Jones, 2005). In this regard it is essential that the management of risk be handled as an organization wide concern. It is the responsibility of employees to involve themselves in recognition of risks at all levels and take remedial measures to prevent these risks.

However with regards to the use of this mode of payment for business the Company can greatly reduce associated risk through the use of electronic media. In this age of the internet the banking industry has advanced to allow paper cheques to be converted to electronic cheques. These electronic cheques can be transferred much faster from one point to the next and rely on international cheque verification systems that can provide security (Gopalsamy, 2009). This approach is likely to provide the Company much needed security in the event of litigation. The agreement to use these systems signifies that the Company can spread some of the risk associated with cheques to the handling company. However, the successful implementation of this would require that the Company and its trading partners agree on a partner to use.

References

Cowan, N., & Russel-Jones, N (2005). Risk Analysis and Evaluation. Wiltshire: Anthony Rowe Ltd.

Goplasamy, N. (2009). Information Technology and E-Governance. New Delhi: New Age International.

Hinkelman, E. J., Manley, M., Nolan, J. L., Shippey, K. C., Bidwell, W., & Woznick, A. (2005). Importer’s Manual USA. Novato, CA: World Trade Press.

Pride, W. M., Hughes, R. J., & Kapoor, J. R. (2009). Business. Mason, OH: South Western Cengage Learning.

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