Belco Global Foods

Summary
We at Belco Global Foods are an international food distribution company. We export to 125 countries across the globe and are nearing $1 billion in annual sales. 40 to 50% of our sales are done on open account terms. We thoroughly examine any customers’ financials before allowing them to purchase from us on open terms. It is important for us to maintain a strong financial position as our gross margins are very low (typically 2 to 4%). For this reason, any time a customer cannot make payments on time, it becomes very troubling and is an issue that must be dealt with immediately to keep our company in a strong financial position. We sell on terms of 30 days, and of our $100 million in average receivables, only 0.0001%, or $10,000 is usually written off as bad debt for our insurance to cover in a year. Our customers come to us because we have proven over many years that our products are the best, and as such we can exercise strict terms to keep our financials tight.

Problem
One of our Russian customers, Kooritsa Kiev, is past due on $84,000 worth of food sold to them on open terms. Additionally, they have another $78,000 bill coming due in 15 days. We must figure out why they are not paying us on time and how to go about correcting this issue.

Analyze Issues
Russia is our 3rd largest market, making up 14% of our annual sales. Kiev is a large client of ours. We have been selling to them for many years, and recently they were deemed access to open terms purchasing due to their good financial records. We have 8 customers located in Russia, and only 2 of them (including Kiev) purchase from us on open terms. The rest are required to wire transfer money in advance. Russia in general has been experiencing troubling GDP shrinkage, and though the drop in growth has declined, they are still behind where they were a year ago.

Kiev currently has a past due account in the amount of $84,000 worth of meats purchased on 30 day open terms. Kiev has received the product and
were very satisfied with it (confirmed with their purchasing agent Sergei Barsov). It has been 40 days since they received the products, and Barsov has claimed payment was sent already, though we have not received it. Additionally, they have another order in the amount of $78,000 coming due in 15 days.

Examining Kiev’s financials, we discovered an alarming issue. All financial denominations below are in Russian Rubles. Kiev’s Days Sales Outstanding (DSO; Receivables/[Annual Sales/365]) was equal to 55,000/[472,500/365] or 42.5 days (up from 36.5 days in 2007). This says that it is taking them 42.5 days from the day they sell our product to receive payment for it. The alarming part about this number comes more into play when examining their margins. Kiev’s cost of sales/sales (or they money they owe us directly for our food) is equal to 392,175/472,500 or 83%.

If we assume that Kiev is paying us before ANY of their other payables, we can take 83% and multiply it by their DSO to get 0.83*42.5 which is equal to 35.3 days. This is to say that it will take them 35.3 days to collect enough of their receivables to make our payment, assuming that they pay us before any of their other vendors. These numbers are troubling as we only offer 30 day terms, and as such, Kiev will never be able to meet these terms until they improve their own DSO and reduce their receivables.

Alternative Courses of Action
1. Engage the customer further- We would speak with someone in Kiev’s sales or receivables office about their financial position. If necessary, we could send someone from our Moscow office to explain to them why this is an issue and how we are addressing it.

Pros:
-Costs us very little
-We can present ourselves in a positive attitude
-Personal meetings help convey that we value Kiev and want to keep them
as a customer
Cons:
-Kiev could drop us and not pay us if they feel offended
2. Litigation or Arbitration- We could file a lawsuit with Kiev on the account due, or threaten to do so.

Pros:
-We will likely receive the money eventually either through court rule or arbitration decision
-Could send a message to our other open terms buyers to keep up with payments
Cons:
-Very expensive for us to do, especially with as small as our margins are
-Kiev will probably not buy from us in the future
-Could send a negative message to our other open terms buyers
-Russian courts may not rule in our favor, and we could end up losing it all 3. File a claim with our insurance company- We can claim this overdue account as bad debt and submit a claim to our insurance company. We pay a premium for them already for this purpose.

Pros:
-We will receive the money
Cons:
-Sends a message that we are weak and forgiving, lots of paper work
-Kiev may also expect the additional 78,000 to be written off
-Our insurance premiums will likely increase, and we want to keep them low
-Our insurance only covers 85 to 90% of the claims value
Solution and Implementation
Our best course of action is course 1: engage Kiev further. This solution is of minimal cost to us. Sending a client from our Moscow office to talk to someone about the issues surrounding their receivables and payables may help to clarify their problems. The one-on-one confrontation will also help to show Kiev that we want to maintain them as a customer. However, we cannot continue open terms sales with Kiev until they have substantially reduced their DSO. We would like to see their DSO consistently (for 3 quarters) below 30 days before we will consider selling to them on open account again. At this number, they will be able to pay us safely in our 30
day terms with a small (around 5 day) buffer. For now, we will have to require wire transfer in advance for any future orders from them. It will be important for the person from our Moscow office to keep a gentle, but firm tone about this. We like Kiev, but business is business and they need to be made to understand that. It may be beneficial for our Moscow officer to point out that currently 75% of our customers in Russia are not using open account terms, and that it is something that must not only be earned, but respected in order to continue.

If Kiev is understanding of the terms, they will pay their current outstanding debts with time. This negates the added expense of filing these two large claims with our insurance agents, as that would be the largest claim we had ever submitted to them, which would certainly increase our yearly premium. Additionally, we will avoid the headache of litigation and keep an otherwise great customer, who with time may be able to return to a successful open terms buyer.