Jack Joseph is the CEO of Acme Consulting Services. Acme provides consulting and customized advisory services in business and quality management. It also offers a compliance program that provides ongoing support to businesses, helping them adhere to health and safety guidelines and environmental regulations. The program includes customized assessments, inspections, reports, site visits and training. Acme's quality management consulting services offer similar features, but only for a fixed period of time. The company has over one hundred clients registered in its compliance program and has provided quality management training to employees from almost two hundred companies. Acme has an office in Trinidad, providing services to clients in countries across the Caribbean.
The Client
Seachest, an Acme client headquartered in Barbados, is a chain of luxury hotels that has six properties on four Caribbean islands. Each hotel has between 120 and 250 rooms. Seachest contracted Acme to provide training and quality management consulting services. A description of the goods and services to be delivered to Seachest included:
• Preparation of detailed inspection and recommendation report on quality control management
• Consulting fees
• 15 instructor-led training sessions over eight weeks for Seachest's entire fulltime staff (includes instructor fee and delivery of sessions)
• Training course materials (includes shipping and handling from Trinidad to Barbados)
• Travel expenses for instructors (to be invoiced upon completion of services)
Seachest was responsible for all custom duties and other fees incurred in Barbados. Training materials, consulting and training services were all on open account with a thirty-day payment term.
As Acme would be providing a large amount of training materials and services over eight weeks on credit, the company would experience a period of negative cash flow for the upcoming two to three months. There would be larger expenses incurred for printing and assembling all the materials at an outsourced printing company and paying the travel expenses for the consultant
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and instructors in advance of receiving payment from Seachest. The sales contract was signed by both parties three months before the scheduled training date.
The Postponement
During the days preceding the start of consultancy and training services, the hotel workers in the housekeeping departments at all six hotels went on strike. The employees demanded an increase in their salaries and for the management team to reduce the number of rooms that a housekeeper had to clean from 15 to 13. The hotel had been adding amenities to the guest rooms, which increased the time each housekeeper needed to clean a room, causing an expectation of longer work hours. The hotels' services were seriously affected by the strike. Two days before the Acme instructor was set to fly to Barbados, Seachest General Manager Karen Levitt advised Acme by telephone that it would be best to postpone the training for at least another month, until things settled down and employee morale improved. If the workers were not happy, they may not be receptive to any form of training.
A Hesitation to Pay
Two weeks before the scheduled training date, the training materials had been sent by shipping company Parapan's liners from Trinidad to Barbados on a CIP negotiated Incoterm®. Seachest had requested the least costly method of shipping materials to reduce its total cost. Seachest received notice that ten boxes of training materials sent by commercial ocean freight were at the port in Barbados. Acme had paid Parapan for risk insurance to cover the value of the materials as well as the fees for customs export documentation to the destination port. The agreed cost of all shipping and documentation expenses was incorporated into the training material sales price on the invoice given to Seachest. Acme included a mark-up on shipping costs. The commercial invoice was made out in U.S. dollars. However, there were additional Destination Handling Charges (DTHC) and customs duties applied to the materials and Seachest needed to pay these before it could receive the materials.
The service interruptions at the hotel had affected revenues; Seachest informed Acme that it would not pay for any services, customs duties or materials until the training and consulting work took place. Karen planned to store the materials until the new training schedule was developed. The training and consulting services were not immediate priorities for the hotel management team. Karen validated her point by noting that the materials were useless to Seachest without the relevant consulting services and training. The hotels were simply postponing the training and consulting services.
According to the sales contract terms, payment was due within thirty days of services rendered. Jack considered the training materials a part of the service. Jack requested that Seachest pay for all the training materials within thirty days following the scheduled training start date. The materials had already been shipped and the instructor's flights had been arranged and paid for. The flight cancellations had incurred a penalty, which he believed was Seachest's responsibility to cover. He invoiced Seachest for the flight cancellation fees, training materials and relevant transportation costs. The sales contract stated the following:
"... the agreement will expire on the completion date as set out in the Service Description unless terminated in writing. Any cancellation to any part of the materials and services as outlined in the Service Description with less than 15 days' notice will incur a cancellation fee of USD 2,000 payable as soon as notice is given...."
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More Looming Cash Trouble
With the postponement of Seachest's consulting services and training, Acme was facing a difficult challenge collecting receivables from other clients in the U.S. and the Caribbean. The company needed a strategy to ensure its negative cash flow would not increase. Five clients, on average, were seventy days past due on payments for their monthly invoices for the compliance program. These clients were credit-worthy businesses, but Acme needed the cash to pay for the company's expenses immediately. They were all on thirty-day payment terms and collectively owed over USD 80,000 on their invoices.
Furthermore, more hotel clients in the Caribbean had been contacting Acme to procure quality management consulting and compliance programs at their hotels as well. To do so, Acme would need to train and hire more consultants. Jack had also considered investing in printing equipment to print and assemble materials in house instead of by outsourcing. This was a good opportunity and meant an increase in future business, but Acme did not have the credit capacity to add more clients right away. Acme's accounting manager had started to request deferred payment plans and payment extensions from the company's creditors.
Acme had taken out a business line of credit two years ago, and monthly payments were still being made. Acme recently took out a business loan for capital expenditure to finance the opening of another office in Kingston, Jamaica. The new office was scheduled to open within three months. Jack began working with a local consultant from Jamaica who was knowledgeable in the areas of quality management and compliance. This consultant would be working at the Jamaican office when it opened, to secure further business and provide more consulting and training services. She would be job shadowing the experienced consultant working at Seachest. Additional business loans were not something Jack wanted to consider, but he needed an immediate cash injection. He approached a factoring company for help. Jack sat down with the account manager at Freeman Trade Finance Limited to hear how it could provide a flexible factoring facility for Acme. Jack had to think about his many options and he was not sure if this would be the right way to increase liquidity at Acme.
Learning Outcomes
This case study relates to the following learning outcomes in the course International Trade Finance:
• Describe types of commercial, currency and other financial risks involved in international trade transactions and describe methods available to minimize them.
• Negotiate payment method as a part of the terms and conditions of a contract for an international venture, considering payment options, current trade research, benefits and relative risk for buyer and seller.
• Make use of cash flow projections, income forecasts and balance sheets to manage cash flows in an international venture.
• Employ the most prudent course of collection procedures for non-payment by an international importer.
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1. Jack had considered investing in new printing equipment. Would you recommend that Jack purchase new printing equipment? Give reasons for your response.
2. a) How can Freeman Trade Finance Limited's factoring facility help Acme's cash flow? Explain the process that the trade finance company uses.
b) What implications will factoring have on Acme's business (reputation, credit capacity, borrowing terms, customers, etc.)?
3. Jack did not want to take out another business loan. What would have been the advantages and disadvantages to using this option compared to invoice factoring as a means of financing for Acme?
4. Jack insisted that Seachest pay for the shipped training materials and consultant/instructor's expenses even though the training and consulting work had not yet occurred.
(a) How can this dispute be resolved?
(b) What could have prevented this dispute from happening?
5. a) What are the financial benefits to Acme and Seachest for using the CIP Incoterm®?
b) State one alternative Incoterm® Seachest could have negotiated to save transportation costs? Explain.
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.
Case Study Questions
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