Consequently, financial risk needs to be managed as it can obviously not be averted completely. In this given scenario the charity, Regeneration Through Charity Limited (RTE) is facing a situation whereby they are purchasing furniture from a new supplier and have been asked to provide a fifty percent down payment before the order can be processed by the furniture company (Great Britain, 2008).
In this case, RTE has no information about the suppliers’ background and making such a huge payment at the very start would be a huge risk. What if the supplier defaults or runs away? What if he doesn’t provide goods of the quality that were asked for? All these questions link to the financial risk faced by the company.
Several methods can be employed by Regeneration Through Charity Limited to reduce the financial risk on this transaction. The most common methods include the use of credit checks, references, the use of a middle man (also known as escrow) and negotiations. Let us look at all of them one at a time.
RTE can perform a credit check on the customer’s background to reduce their financial risk. Credit checks are checks on a company’s financial status to determine creditworthiness. They are often carried out prior to giving loan or making an advance payment to determine if the other party is capable enough of carrying out their part of the transaction properly. Credit checks are often run through the help of credit bureaus, bank information and calls to other financial institutions for verifying financial information (Credit Control, 1979). RTE can verify the company’s creditworthiness by determining the company’s credit score.
RTE can also make the use of references provided by the customer (supplier) to minimize their financial risk. How this mechanism would work is somewhat simple. At or before the two parties get into a contract, they exchange a list of references. A reference is someone who can verify that the details provided by a certain person are legitimate or not. What Regeneration Through Charity Limited can do here to minimize their exposure to financial risk is to verify the details of the supplier through all the known references prior to making any payment to the supplier. This would make sure they don’t get themselves exposed by paying for something that isn’t right. Since the references mentioned are often company’s and people of high repute so the information that would be obtained is highly likely to be credible and give a correct picture of the supplier’s position.