True cost of becoming export ready
Payment terms
Working out payment conditions for the new market is also important. 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.
Further costs
Once you start exporting, you will have further costs such as promotional campaigns, after sales service, insurance, transportation costs and modifications you may need to make for a particular market. You should also 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, you may have to find additional sources of finance to meet shortfalls caused by delay.
You will also need to consider whether you have the capacity to meet increased demand and if not, how you can increase capacity. Another consideration is whether you need to keep a reserve of your product in the market: if so, this means an increased percentage of your working capital is tied up in stock and you will have to pay additional warehousing costs.
Cost of risk
There are three main financial risks of which potential exporters should be aware.
- Damage or loss of goods before payment can be mitigated by taking out marine or air freight insurance.
- Exchange rate risks can be mitigated with specific market instruments, especially forward foreign exchange contracts, currency swaps and currency futures and options.
- Credit risk can be mitigated through credit insurance.
Another risk is to your intellectual property. You should take steps to protect your intellectual property through trademarks and patents in the market you are exporting to.
Once you have started exporting, you should review results against your budgeted projections. If you are well behind projections, you should seek explanations as to why and, if necessary, revise your forecasts. If new forecasts show continued financial problems, then serious consideration needs to be given to abandoning exporting. 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.
—Gavan Ord is a business policy adviser with CPA Australia
10 steps to becoming export ready
- Understand your current financial position
- Identify the costs you will incur to become export ready
- Make sure you have the necessary cash flow
- Identify all the costs of operating in a new market
- Incorporate all costs and your desired margin into the price you will charge
- Forecast a sales volume at that price
- Determine whether you have the capacity to meet expected sales
- Analyse potential revenue against the predicted costs to determine if exporting is worth your while
- Determine your payment terms based on your cash flow needs
- Have strategies to manage your risks, including exchange rate risks
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