Avoid a cash flow crunch
Speeding up the cycle
The next step is to get the basics right by taking control of each stage of the cycle. Here are a few tips to get you started.
Managing cash: Create a detailed cash flow forecast, then analyse the capital needs of your business.
Consider putting a safety net in place by using export finance to bridge the cash flow gap.
Managing business inputs: Negotiate better payment terms with key suppliers, or ask for a discount for prompt payment. Forecast your future production needs and buy raw materials just in time, delaying expenditure. Protect yourself against the risk of delayed delivery or non-delivery of goods from overseas suppliers by selecting the right payment method.
Managing sales: Set your prices to maximise profit, not sales. Make sure you take into account all of the costs of doing business, including overheads, administrative costs, and the cost of accessing working capital.
Managing accounts receivable: Carefully track the average number of days it takes for accounts receivable to be paid, then work to reduce that number. Negotiate shorter terms of trade with key customers, and make sure they understand your terms; again, the payment method you agree with your overseas customers is crucial.
For exporters, the payment method you choose not only influences when you get paid, it also determines who carries the risk of the transaction. As an exporter, the ideal solution is to be paid in advance by international money transfer. For that to happen, you either need to have a unique product, a powerful competitive advantage, or a strong relationship of trust with your overseas customers or distributors. Unfortunately, for most businesses, that is not always the case. That’s when you need to start looking for alternatives that provide security to both you and your customers.
A documentary credit can be attractive option, especially when dealing with new and unproven customers. It gives you a high degree of security that you’ll be paid promptly, with payment guaranteed by the buyer’s bank after the goods have been shipped.
For more established customers, documentary collection can also work well, although payment can take a little longer. With documentary collection, you ship the goods, then send the shipping documents to the buyer’s bank via your own bank. The bank releases the documents to the buyer when they have fulfilled the conditions, usually by making an immediate payment or promising a future payment. The documents give the buyer title to the goods.
All of these solutions have their pros and cons; often it’s a question of choosing the right solution for each customer, or even each shipment. A trade finance specialist can give you more information about your options and help you make the right choice for your individual circumstances.
Click for full size tableBridging the cash flow gap
Almost every business needs a little extra cash from time to time, especially when you’re trying to bridge the gap between sending goods overseas and getting paid for them. That’s when trade finance solutions really come into their own. Once again, there is a range of solutions to choose from, each tailored to a slightly different need. Here are some of the most popular:
Trade advance: Short term finance for a particular transaction. Trade advances are generally available for periods of 30–180 days, so you can choose a term to match your cash flow cycle.
Foreign bills negotiated: Designed for exporters who use documentary collection, foreign bills negotiated gives you finance when the goods are shipped. It’s usually available for terms up to 180 days, so you have almost six months breathing space for your buyer to pay.
Without recourse export finance: Designed for exporters who use documentary credits, without recourse export finance gives you guaranteed payment as soon as the conditions of the documentary credit are met.
Insured export finance: This is the maximum security option. Insured export finance gives you accelerated payment through a loan secured by a trade credit insurance policy. So even if your customer doesn’t pay, your exposure is reduced.
There’s plenty to think about, and the issues are sometimes complex. That’s why it can be a good idea to consult a trade finance specialist at your financial institution.
—Sunil Aranha is the head of Trade Working Capital at the Commonwealth Bank (www.commbank.com.au/trade) and our Dynamic Export banking expert.
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