It’s a truism that many otherwise profitable businesses fail because they run out of cash. While profit is the reason you’re in business, cash flow is what keeps you there—and cash flow and profit are two different things. You may be making profitable sales, but your business can still suffer if those sales aren’t being converted quickly enough into money in the bank. In fact, it’s not uncommon for businesses to fail when demand for their products is hottest. That’s because a rapidly expanding business also has rapidly expanding expenses, while the income from those new sales can take time to land in your bank account.
Unfortunately, the danger is greater for exporters than for almost any other kind of business. Even if you have an established business, exporting can stretch your finances to the limit, simply because it takes so much longer to transport your goods to market, clear them through customs, and get them into the hands of your distributor or customer. Depending on your payment terms and shipping arrangements, that can open up a sizeable cash flow gap thanks to the time lag between paying for supplies and getting paid by your customer.
Then there are the effects of unexpected economic fluctuations, like changing interest rates, unpredictable commodity prices and volatile foreign exchange rates. Without hedging, a sudden spike in the value of the dollar can turn a profit into a loss. All of which makes it essential to put protection in place, so that you never have to suffer a cash flow crunch.
The cash flow cycle
A good starting point is to think about how cash flows into and around your business, then consider how you can get it moving faster. You’ve probably heard of the cash flow cycle, which starts with the cash you invest in your business or earn from sales. You spend that money on business inputs, including salaries, rent, supplies, marketing, whatever you need to keep your business running and get your product out the door.
Next come sales, but that isn’t the end of the process. Unless you’re paid cash upfront, your sales go into accounts receivable, while you’re waiting for the money to arrive. It’s only once you’ve been paid that they go into cash and you’re ready to start spending again.
The important point is this: every dollar you invest in your business has to go all the way around the cash flow cycle before it comes back to you, bringing some profit with it. So the faster you can make the cycle turn, the more successful your business will be.
A long cash flow cycle not only means you have to wait longer before making a profit, and even longer before making a profit on your profits, it also means you need to have more capital tied up in your business, so that you can keep things running until the cash comes in. If you have borrowings, it’s the direct interest cost; if you’re lucky enough to be debt free, it’s the indirect opportunity cost of not being able to invest that money in something else, like growing your business.
Now you begin to see why exporters face a unique set of challenges. Not only is your cash flow cycle likely to be longer than that of most other businesses, you may also face more uncertainty, both in the time it takes to deliver the goods and get paid, and in the variability of all those other factors that influence your costs and your revenues.
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