Entering into an international trading relationship can appear complex and challenging to many SMEs. The risks are real and need to be carefully managed.
However, if SMEs identify sound overseas markets, develop effective long-term partnerships and take prudent financial advice the growth opportunities are too great to be ignored.
Globalization and the age of the internet also mean it is now easier than ever before to get started and reap the benefits of importing from overseas or exporting goods and services to new countries.
Adam Howard, Commercial Director Australia at Western Union Business Solutions, told Dynamic Business there were significant growth opportunities for businesses in striking international trading relationships if they did their homework.
Mr Howard said the average SME already importing and exporting was trading with two countries and 34 per cent had started trading with more than 2 countries in the past twelve months.
He said that 32.4 per cent of SMEs expected their export revenue to increase by 7 per cent in the next 12 months and 62 per cent expected that growth to be driven by sales in emerging markets.
China is of critical importance to businesses in Australia, with Mr Howard saying that about half of Australian SMEs had already done business there. He also reported growing trade with South America.
However, he said smart SMEs should assess their ideal overseas markets and also develop steps to mitigate exposure to foreign currency fluctuations. He warned that, if no action was taken on this front, foreign currency variations could pose challenges to SME cash-flow.
For example in the 2013-14 financial year, the Australia dollar traded between 98 and 86 cents, meaning SMEs were more likely to have experienced cash flow shortfalls arising from unexpected shifts in invoice costs.
“72 per cent of Australian SMEs don’t fix the costs of their foreign invoices in advance and don’t know the true cost of their invoices until they fall due. A likely consequence of that is that if costs run higher than planned businesses are having to dip into working capital to fund those higher costs,” Mr Howard said.
“A prudent strategy for gaining visibility into the value of those foreign invoices is to implement a cash management strategy with a financial partner. This can include strategies such as fixing rates with suppliers or hedging your FX with a financial institution. These provide visibility and control over foreign currency exposures.”
Mr Howard suggested a number of potential mechanisms to help mitigate risk, including a forward exchange contract. A forward exchange contract allows a business to lock in a gross profit margin by fixing the foreign exchange rate for a buyer’s future payments. This has the effect of providing greater certainty for both parties.
A hedge credit facility would also see a financial provider or bank provide a mechanism in which credit can be freed up for growth initiatives in return for a guarantee such as the freeing of an asset.
“You can use this rather than an overdraft and that’s a real cost effective way of managing your cash flow, particularly if you’re exposed to foreign currency,” he said.
Businesses that import products from overseas to obtain cost advantages should also take precautions. For example, one common approach is to ask for samples before jumping into a more serious arrangement with a potential international supplier.
This will give an insight into the quality of the product being offered. SMEs may like to ask for samples from a range of potential suppliers before making a decision.
Importing from overseas can also help to differentiate a business’ product line, although the basic question of how much to buy and at what price will always apply.