Management Accounting

Capital Contrarians

Loosen your credit rules a bit, and you may not have to turn down business from a customer who needs more time to pay.
Simon LittlewoodNovember 14, 2007

The annual budget ritual is upon us, and it looks as though
businesses will be in for a rough time in 2008. The International Monetary Fund recently announced
global growth will slow to 4.8 percent and U.S. growth to a glacial 1.9
percent. True,
to judge from conflicting forecasts, the experts might as well be relying
on chicken
entrails to predict the future, as the Romans once did. But one thing is
certain: any
day now Asian business leaders can expect a phone call from the global CEO
them to up their forecasts for 2008 to show more contribution from Asia.

Some companies are already responding with a contrarian solution —
some working capital to spark new life in the P&L. Thomson Financial
is one. “When
I look around I see clear evidence that companies are losing growth
opportunities by
being too inflexible on trading terms,” says CFO Kellie Goldstein.

Companies typically have strict rules on the amount of credit they can
advance customers. Loosen up a bit, and you may not have to turn down
from a customer who needs more time to pay. “Where your weighted average
of capital (WACC) exceeds local interest costs, you can displace
competitors by
offering longer payment terms and fund it from cheap borrowing,” says

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Some CFOs are finding promissory notes a convenient way to fund a
payment term. In China, for example, banks will advance cash against these
notes at a low interest rate and will discount the notes for as little as
3 percent.

One company in China’s Pearl River Delta is exploring another use for
capital. It confronts a market where distributors aren’t willing to take a
chance on
its products, which are new to customers. So it’s taking advantage of
cheap capital to
offer distributors a “sale-or-return” model, taking the risk away from the

“Bottom line: even with the cost of capital rising — most recently
by 0.7
percent in China — there are a number of markets where by any
measure local
borrowing is much cheaper than the global WACC,” says Goldstein. “This can
provide real opportunities for the creative CFO to enable some extra