2. Henry and Judy did not agree to have an open account with Jackson Foods. a) What would be the disadvantages of So Maple having an open account with Jackson Foods? b) If Henry and Judy agreed to an open account, what steps could they take to ensure their profit margin is still achieved? 3. Henry and Judy agreed for Jackson Foods to make a down payment on its order before they shipped it. What recommendations would you give to Henry and Judy about determining the selling price and payment options for Jackson Foods as a new international customer? 4. a) Based on the new exchange rate, what would be the new Canadian equivalent that so Maple would be receiving for the outstanding balance? b) What suggestions do you have to help So Maple protect its profit margin against foreign exchange risk? Not All Is Sweet for a Maple Syrup Producer SO 503 Background Henry is the owner of the small maple syrup production company So Maple, based in Quebec, Canada. Henry and his family own a large property with hundreds of maple trees. Henry runs the business with his sister Judy, who is co-owner and sales manager. So Maple has been exporting internationally for over two years. Judy has grown the business by reaching out to customers online, at trade shows and even meeting them in person in countries throughout Europe, North America and Asia. Henry has observed that slow product demand and currency fluctuations have resulted in severe losses for the business. There have also been issues collecting payments from overseas customers, which have not helped the business' balance sheet. He realized that he had to find different means to hedge against losses in the next financial year. Jackson Foods-An Exciting Opportunity A few months ago, three truckloads of maple syrup worth CAD 40,000 were sent to food importer Jackson Foods in Jacksonville, Florida. Jackson Foods supplies products to several major health food stores in northern Florida. Both Henry and Judy were excited they had secured the American food importer as a new customer. If things went well, there would be potential for even greater sales in the future. Usually, So Maple would only conduct business with international customers who agreed to cash- in-advance payment terms. So Maple had previously lost business to a competitor who agreed at the start of sales negotiations to open accounts with its customers. Jackson Foods requested an open account with So Maple, but this was dismissed by both Henry and Judy. However, Judy did not want to appear aggressive in her sales negotiations with Jackson Foods. So Maple agreed to receive an upfront down payment instead of full prepayment prior to sending the products to Florida. Before the title of goods could be transferred to Jackson Foods, the outstanding amount was required. Henry determined the selling price of the products sold to Jackson Foods based on what he would have charged a similar customer in Canada. He then charged Jackson Foods for freight costs. Before So Maple shipped the products from Canada, Jackson Foods paid the down payment of USD 25,000 by wire transfer. The outstanding amount of USD 15,000 was not insured as Henry FITT 1 International Trade Finance believed that, as a subsidiary of a large company, Jackson Foods was creditworthy. At the time of the sales negotiations, the Canadian dollar was at par with the American dollar, Jackson Foods was involced in U.S. dollars for its product order. The exchange rate entered on the invoice record was CAD 100 - USD 1.00 Waiting for the Balance When the shipment of products arrived in Jacksonville, the freight forwarder released the cargo to Jackson Foods without receiving confirmation from So Maple that Jackson Foods' final payment had been received. The freight forwarder assumed that the title of the goods could be passed on to Jackson Foods based on the CIP Incoterm rule that was negotiated. No reference was made to the sales contract, which stated that final payment was required before transferring the title of goods. A month later, Jackson Foods had still not paid the remaining balance on its account. After several attempts to contact Jackson Foods, Henry was told that the finance manager would contact him soon to make the payment. Another few weeks went by, and Henry still had not received the final payment. This contributed to a significant reduction in So Maple's overall profit margin, as the outstanding balance represented a substantial percentage of its annual revenue As time passed, there were changes in the value of the Canadian dollar. The cost of packaging the maple syrup, along with other company expenses, started to rise. The Canadian dollar increased in value to a weekly average exchange rate of CAD 1.00 - USD 1.09. As sales receipts from U.S. customers were applied to invoices, So Maple calculated foreign currency losses. Henry realized the sales receipts were less than expected. The Follow Up Henry contacted his lawyer to see whether he could bring legal charges against the freight forwarder for releasing the goods before payment was received. He also considered researching alternatives to calling the finance manager at Jackson Foods weekly to request an update on the outstanding CAD 15,000 Henry contacted the Canadian Trade Commissioner Service and a few other exporters associations to get some advice. They suggested he consider purchasing export credit Insurance for his next international transaction involving credit as a payment term, or obtaining a standby letter of credit which operates as a guarantee to protect exporters in such trade transactions. He approached several private credit insurance banks and institutions. The premiums on the coverage would not be substantial even though So Maple was not yet an established or experienced exporter. Henry had considered taking out a business loan in the future to invest in some equipment to replace old machinery. Having a long-standing bad debt would not be advantageous for So Maple's business loan application. He had to make a plan for future International orders. Case Study Questions 1. a) What is an alternative to calling the finance manager about collecting the bad debts from Jackson Foods? b) What effects will this alternative have on So Maple's cash flow and amounts received? 2. Henry and Judy did not agree to have an open account with Jackson Foods. a) What would be the disadvantages of So Maple having an open account with Jackson Foods? b) If Henry and Judy agreed to an open account, what steps could they take to ensure their profit margin is still achieved? 3. Henry and Judy agreed for Jackson Foods to make a down payment on its order before they shipped it. What recommendations would you give to Henry and Judy about determining the selling price and payment options for Jackson Foods as a new international customer? 4. a) Based on the new exchange rate, what would be the new Canadian equivalent that so Maple would be receiving for the outstanding balance? b) What suggestions do you have to help So Maple protect its profit margin against foreign exchange risk? Although based on research of actual events, organizations and/or individuals, this case study is fictional and is intended to support learning. Cases are not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management 2. Henry and Judy did not agree to have an open account with Jackson Foods. a) What would be the disadvantages of So Maple having an open account with Jackson Foods? b) If Henry and Judy agreed to an open account, what steps could they take to ensure their profit margin is still achieved? 3. Henry and Judy agreed for Jackson Foods to make a down payment on its order before they shipped it. What recommendations would you give to Henry and Judy about determining the selling price and payment options for Jackson Foods as a new international customer? 4. a) Based on the new exchange rate, what would be the new Canadian equivalent that so Maple would be receiving for the outstanding balance? b) What suggestions do you have to help So Maple protect its profit margin against foreign exchange risk? Not All Is Sweet for a Maple Syrup Producer SO 503 Background Henry is the owner of the small maple syrup production company So Maple, based in Quebec, Canada. Henry and his family own a large property with hundreds of maple trees. Henry runs the business with his sister Judy, who is co-owner and sales manager. So Maple has been exporting internationally for over two years. Judy has grown the business by reaching out to customers online, at trade shows and even meeting them in person in countries throughout Europe, North America and Asia. Henry has observed that slow product demand and currency fluctuations have resulted in severe losses for the business. There have also been issues collecting payments from overseas customers, which have not helped the business' balance sheet. He realized that he had to find different means to hedge against losses in the next financial year. Jackson Foods-An Exciting Opportunity A few months ago, three truckloads of maple syrup worth CAD 40,000 were sent to food importer Jackson Foods in Jacksonville, Florida. Jackson Foods supplies products to several major health food stores in northern Florida. Both Henry and Judy were excited they had secured the American food importer as a new customer. If things went well, there would be potential for even greater sales in the future. Usually, So Maple would only conduct business with international customers who agreed to cash- in-advance payment terms. So Maple had previously lost business to a competitor who agreed at the start of sales negotiations to open accounts with its customers. Jackson Foods requested an open account with So Maple, but this was dismissed by both Henry and Judy. However, Judy did not want to appear aggressive in her sales negotiations with Jackson Foods. So Maple agreed to receive an upfront down payment instead of full prepayment prior to sending the products to Florida. Before the title of goods could be transferred to Jackson Foods, the outstanding amount was required. Henry determined the selling price of the products sold to Jackson Foods based on what he would have charged a similar customer in Canada. He then charged Jackson Foods for freight costs. Before So Maple shipped the products from Canada, Jackson Foods paid the down payment of USD 25,000 by wire transfer. The outstanding amount of USD 15,000 was not insured as Henry FITT 1 International Trade Finance believed that, as a subsidiary of a large company, Jackson Foods was creditworthy. At the time of the sales negotiations, the Canadian dollar was at par with the American dollar, Jackson Foods was involced in U.S. dollars for its product order. The exchange rate entered on the invoice record was CAD 100 - USD 1.00 Waiting for the Balance When the shipment of products arrived in Jacksonville, the freight forwarder released the cargo to Jackson Foods without receiving confirmation from So Maple that Jackson Foods' final payment had been received. The freight forwarder assumed that the title of the goods could be passed on to Jackson Foods based on the CIP Incoterm rule that was negotiated. No reference was made to the sales contract, which stated that final payment was required before transferring the title of goods. A month later, Jackson Foods had still not paid the remaining balance on its account. After several attempts to contact Jackson Foods, Henry was told that the finance manager would contact him soon to make the payment. Another few weeks went by, and Henry still had not received the final payment. This contributed to a significant reduction in So Maple's overall profit margin, as the outstanding balance represented a substantial percentage of its annual revenue As time passed, there were changes in the value of the Canadian dollar. The cost of packaging the maple syrup, along with other company expenses, started to rise. The Canadian dollar increased in value to a weekly average exchange rate of CAD 1.00 - USD 1.09. As sales receipts from U.S. customers were applied to invoices, So Maple calculated foreign currency losses. Henry realized the sales receipts were less than expected. The Follow Up Henry contacted his lawyer to see whether he could bring legal charges against the freight forwarder for releasing the goods before payment was received. He also considered researching alternatives to calling the finance manager at Jackson Foods weekly to request an update on the outstanding CAD 15,000 Henry contacted the Canadian Trade Commissioner Service and a few other exporters associations to get some advice. They suggested he consider purchasing export credit Insurance for his next international transaction involving credit as a payment term, or obtaining a standby letter of credit which operates as a guarantee to protect exporters in such trade transactions. He approached several private credit insurance banks and institutions. The premiums on the coverage would not be substantial even though So Maple was not yet an established or experienced exporter. Henry had considered taking out a business loan in the future to invest in some equipment to replace old machinery. Having a long-standing bad debt would not be advantageous for So Maple's business loan application. He had to make a plan for future International orders. Case Study Questions 1. a) What is an alternative to calling the finance manager about collecting the bad debts from Jackson Foods? b) What effects will this alternative have on So Maple's cash flow and amounts received? 2. Henry and Judy did not agree to have an open account with Jackson Foods. a) What would be the disadvantages of So Maple having an open account with Jackson Foods? b) If Henry and Judy agreed to an open account, what steps could they take to ensure their profit margin is still achieved? 3. Henry and Judy agreed for Jackson Foods to make a down payment on its order before they shipped it. What recommendations would you give to Henry and Judy about determining the selling price and payment options for Jackson Foods as a new international customer? 4. a) Based on the new exchange rate, what would be the new Canadian equivalent that so Maple would be receiving for the outstanding balance? b) What suggestions do you have to help So Maple protect its profit margin against foreign exchange risk? Although based on research of actual events, organizations and/or individuals, this case study is fictional and is intended to support learning. Cases are not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management