Managing Cash for First-Time Exporters

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When it comes to managing cash, things can become a lot more complicated if a business is trading internationally, so businesses considering exporting goods for the first time should take care to plan ahead. Nick Farmer, Partner and international trading specialist at Menzies LLP, below explains the process of managing cash and the payments cycle when it comes to international markets.

While many first-time exporters will be attracted by the revenue opportunities that new geographies might offer, the decision to expand overseas should not be taken lightly. In order to be successful, businesses must have sufficient resources in place and it is important to recognise that the investments required to activate an export initiative could have a significant impact on cash flow.

From a cash perspective, factors such as customs delays, longer delivery times and increased payment terms can all put a strain on the working capital cycle of businesses exporting for the first time. At the same time, large numbers of new customers, potential issues around foreign currency exchange and greater use of credit are likely to increase the organisation’s risk profile.

Preparing a detailed set of financial projections can help first-time exporters to assess the financial viability of their overseas expansion and give them a full understanding of how it could impact their cash position. Three-way forecasting involves integrating information from data sources including their profit and loss accounts, balance sheets and cash flow reports in order to predict the financial position of the business based on a number of possible scenarios. For example, the need to insure against increased geopolitical risks, the payment of trade tariffs or the imposition of withholding taxes in certain markets could come as unexpected additional costs if not identified and built into financial forecasts at an early stage.

When it comes to cash-flow modelling, some businesses may be unsure how far ahead to forecast and this is likely to depend on the organisation’s strategic objectives. At the very least, businesses should ensure that forecasts cover the entire trade cycle, from receiving an order to its fulfilment and taking payment. This will reassure the management team that the resources exist to cover any operational overheads without experiencing cash-flow difficulties.

For companies with plans to grow significantly in the near future, it may be necessary to take further precautions to protect working capital. Once cash-flow modelling has been undertaken, appropriate steps should be taken to improve the business’ financial position and ensure a healthy profit margin. For example, this may involve renegotiating contract terms with customers or lengthening payment terms with key suppliers to avoid running short of cash as they ramp up their export drive.

It is also important to proactively manage the payment process with overseas customers before it undermines the company’s financial position. For instance, getting paid in advance and using Letters of Credit can mitigate the risk and ensure punctual payment. If credit is to be offered, before entering into any agreement, it will be important to carry out credit checks, consider the use of export credit insurance and establish efficient credit control procedures.

Another area of risk for first-time exporters is exchange controls, which may make it difficult to transfer local currency out of a particular market, for example, China, India and parts of Africa. The planning process should involve taking the time to fully understand the regulations and restrictions (including documentation and local taxes), agreeing with the customer how these requirements will be met, and incorporating time delays into the cash flow forecasts. Needless to say, where possible, it makes sense to get paid upfront for all or a significant amount of the contract value.

UK Export Finance, a Government body which provides support to businesses trading internationally, can also help first-time exporters to secure overseas contracts. It works alongside banks to combat late payments and helps businesses to obtain attractive financing terms.

The trend towards increased globalisation is being driven by significant new opportunities in overseas markets and for some UK businesses, exporting could enable them to increase revenues dramatically and in a relatively short time scale. However, for the best chance of success, it is essential to consider cash-flow implications carefully and take steps to mitigate risk. By using three-way forecasting, identifying all the additional costs, and weighing up risks and opportunities, first-time exporters can achieve their strategic goals.

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