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Categories
| Becoming export-ready: What SMEs need to do |
| Written by CPA Australia | |||
| Wednesday, 03 June 2009 00:21 | |||
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Assessing your financial position This requires you to prepare financial statements (profit and loss, balance sheet and cash flow statement) and budgets including cash flow forecasts. These documents will allow you to assess your current and projected financial positions. While your financial position should not dictate your plan, it should be a vital consideration as you must realistically assess the resources, time, skills and commitment needed to building an export market over a sustained period of typically between 12 and 18 months. Export plan After you have matched your exporting ambitions with the reality of your financial position, you need to develop an export plan as part of your overall business plan, setting objectives, including financials, against which you can measure performance. The first step is to conduct market research, which will vary in cost, time and complexity, depending on the product or service, the customers’ needs, the country and on the information and experience already available to you. Even though you may be able to do much of this research in your home country, you will still need to make visits to the market itself. Other preparatory costs Other potential outgoings you will need to budget for include the cost of participating in trade events, developing promotional material for different markets, developing a corporate and product profile, interpreting and translating services, any product customisation, due diligence on potential partners/agents, legal fees, etc. Financial projections Your financial projections must reflect the full cost of establishing and operating in a market, including your time and the time of your employees in establishing and the ongoing management of the new market, so that an informed decision can be made. Distribution channels Once you have identified a target market, consider how best to distribute your product. Channels include direct sales, licensing, agents, distributors, etc. Do a cost-benefit analysis of the various options. Part of your due diligence should include reviewing whether any potential partner has the resources (financial and otherwise) to perform the required tasks. Pricing While the cost of getting the product to market (including the cost of any modifications) and your required margin are not the only pricing considerations, they will be the most significant over the medium to long term. While introductory prices are a tool to create interest and build market share, you should test how successful your product or service will be if it is priced appropriately, as this will be the price that you will want to sell at over the long run. Pricing should consider the risks of currency fluctuation, commission/retainer payable to an agent and transportation cost. Forecast sales volume for given prices. Before finalising, put forth your preferred price and be prepared to negotiate. Do not chase any sale, but chase profitable sales. Avoid a fixed price as this transfers all the risks only to you, and make sure you have the ability to pass through cost increases, and vice versa (for example, because of currency fluctuation). Payment terms The payment conditions should reflect not only the generally accepted terms of trade in that market but more importantly your cash flow needs. You should also arrange the terms against which you are going to be paid, such as cash in advance, documentary letter of credit, bills of exchange, open account or consignment. Exporting issues? Once you start exporting, you will have further costs such as promotional campaigns, after-sales service, insurance, transportation costs and modifying product or services and packaging. Factor in lead times of getting the product to market and any minimum or maximum order requirements into production planning and cash flow forecasting. If there is a long lead time, the business may have to find additional sources of finance to meet any shortfalls. Consider whether you have the capacity to meet increased demand and if not, how you can increase such capacity. Another consideration is whether you will have to keep a reserve of your product — if so, this means that an increased percentage of your working capital is tied up in stock and you will have to factor in additional warehousing costs. Risks There are three main financial risks that potential exporters should be aware of. These risks are:
Businesses are able to mitigate exchange rate risks with a variety of market instruments, especially forward foreign exchange contracts (which will guarantee a fixed rate of exchange), currency swaps and currency futures and options. Take steps to protect your intellectual property through trademarks and patents in your target export market. Review Once you have started exporting, you should review actual results against your budgeted projections. If you are well behind your projections, then you should seek explanations and, if necessary, update your forecasts. If the updated forecasts show continued financial problems, then serious consideration needs to be given to abandoning exporting to the market. If you are well above forecast, then you may need to consider what additional capacity may be needed to continue to keep pace with demand.
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