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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A performance bond follows much the same concept, acting as a kind of insurance for the buyer that you will do the job that you have been contracted to do. But this can be a problem, especially for small to medium exporters who either don’t have that kind of money, or could better use the cash elsewhere in their business. This is where financial institutions can step in, fronting up the performance bond for a fee, so that you can complete the job, get paid and grow your business.

Essentially, you don’t touch the money, says Andrea Govaert, executive director for SMEs at the Export Finance and Insurance Corporation (EFIC). “It’s a bond that has been issued by a third party on behalf of an exporter in favour of an overseas buyer. And it is an assurance for the buyer that if the exporter doesn’t perform the contract, the buyer has a ability to call on the bond and reduce their losses.”

Time to bond

Most bonding products require a robust balance sheet so the financial institution knows you’re able to pay back the money for which they’re covering you. Every bank provides a facility like this, says Govaert.

However, there may be situations where the bank perceives the credit risk as too high, which is where a guarantee can help. “We provide a bond or a guarantee in situations where the bank doesn’t want to. We tend to be more of a risk-taker,” remarks Govaert. “EFIC will provide a back-to-back guarantee where we provide the guarantee and the bank will issue the bond. Also, if a foreign buyer isn’t familiar with EFIC, then they may not be willing to take a bond from us, but they’ll take one from a bank and EFIC will guarantee it.”

In providing both direct bonds and guarantees, EFIC understandably takes a wider view of exporters that may be suitable for this facility. “We do not look at it from the balance sheet, what we look at primarily is the ability of the exporter to comply with the contractual requirements, if they are technically competent to deliver under the contract,” Govaert explains.

The assessment starts with an application form, where the exporter needs to explain the tender, nature of the contract, how much they need, and who is the counterparty. It helps if the exporter has a proven track record in the industry and has a list of successfully completed transactions.

EFIC will then indicate the price of the bond, based on the strength and nature of the business, as well as taking into account the contract. “Clearly a six-month bond is a very different concept to a five-year bond,” says Govaert. “We also take the risk profile of the country into account.”

The contract is another key aspect of the bonding process. The parties need to specify milestones, and set realistic expectations in a realistic contractual period, she explains. “Usually the bond reduces with time, but you need a trigger point that needs to be clearly defined in the contract, otherwise there will be grounds for dispute.”

Who bonds?

Exporters that need bonds tend to be in the construction, engineering, oil and gas, cleantech, or mining industry. Sometimes they are in the process of commercialising technology, so the buyer needs a guarantee that the product will be delivered. Most are medium-sized businesses looking to grow; often the need for a third party to cover the performance bond indicates their first big contract. “Typically it’s the mid-sized companies. The bonding facility enables companies that are technically competent to undertake contracts that are much larger than their balance sheet than their normal circumstances allow them to do,” says Govaert.

Ironically, the companies that are big enough to afford bond money don’t tend to need it. Mature businesses such as BHP Billiton or Leightons have strong enough reputations that allow them to dictate the terms of a contract.

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Exporting is challenging at the best of times, let alone if the coffers are on the dry side. Businesses need working capital to take advantage of opportunities and grow their business. Indeed, it’s a topic close to the heart of many SMEs at the moment.

The JP Morgan-Fujitsu Consulting Australian SME Market Report published in July 2009, found the number one priority for SMEs when borrowing funds is to maintain sufficient working capital.

The report included survey responses from 15,000 SME business owners and found that it now takes longer for companies to be paid by debtors, with the average delay more than 50 days, compared to less than 40 days in 2006. Because of this, SMEs are becoming more reliant on loans to maintain adequate working capital, and are borrowing at high interest rates.

Of those surveyed, 44 percent carry interest rates of between 6-8 percent, with 36 percent paying above eight percent interest. In a business climate with shrinking confidence, it is more important than ever for exporters to leverage the best assistance available.

What is working capital?

Vince Cali, senior manager of product management in supply chain finance and working capital services for the National Australia Bank (nab) says: “Working capital is the day-to-day cash required to run a business, and cash flow best captures the essence of it.

“For exporters, competition not only comes from domestic firms, but organisations on the world stage. To remain competitive, exporters are often required to extend favourable trading terms to customers, which can mean longer delays in collecting payments compared to other businesses.

“On the input side, exporters often need to pay suppliers of goods or services in support of their sales quickly, which places further pressure on cash resources. Exporters still need to pay staff and meet other expenses, so sound working capital becomes critical.”

Traditional sources of working capital include an overdraft on a bank account, loans, business credit cards, sales of account receivables, sale and leaseback of equipment, and future credit card receipts.

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If you’re the kind of exporter who watches exchange rate movements with a little trepidation, maybe it’s time to consider ways of managing your money beyond the daily rate.

Fluctuations in the foreign currency market occur for various reasons, but are mostly in tune with traders’ appetite for risk. But the perception of risk changes daily—even hour-by-hour—as political announcements occur, company information comes to light and global events unfold.

To avoid the whims of traders, exporters dealing in foreign currency for business transactions are advised to lock in a forward exchange contract.

Put simply, a forward exchange contract is an agreement between you and your provider to exchange a specified amount of one currency for another currency on a particular date, using a set rate calculated at the point of making the contract.

The aspect that you need to remove from your thinking is that the forward rate is a prediction of the exchange rate at that future date—it is not.

“A forward exchange contract is made up of two components: the spot component, which is effectively the rate of the two currencies on the day, and the forward component, which is a reflection of the interest rate differential, the difference between the interest rate in one country versus another over that time period,” explains Tim Keith, head of Treasury Management at the National Australia Bank. “At the end of the day there is no other mathematically correct way to do it.”

Anyone with foreign currency transaction in their business should consider setting up a forward exchange arrangement with their financial institution; most providers will offer this once they understand the foreign exchange requirements of your business.

“Any business that has exposure to a currency through importing, exporting or trade of some sort should consider the use of forward exchange contracts. It doesn’t matter if you’re big, small or in between,” says Keith.

He suggests that a forward exchange contract should centre on existing supply contracts you have with customers.

“In some markets that’s just from month-to-month,” he says. “Meat is a classic example where there are no long-term supply contracts, they tend to have much smaller tenure forward exchange contracts or they just use the spot market, whereas there are other businesses that have contracts to supply 12 months or two years out. That will obviously increase the tenure of their contract.”

Forward exchange contracts can be negotiated for up to 10 years into the future, though this length of tenure is understandably rare. “It’s really uncommon because no one has [supply] contracts out for 10 years. What they’re saying is that they don’t consider that their business model will change dramatically in a 10-year period and therefore they’re willing to lock in their cash flow,” Keith explains.

Your relationship with your exchange provider will help you decide what’s appropriate for your business, so be open about what you want to achieve and what you want out of the contract.

“They might say ‘I want to lock in a rate for 12 months’ and then after we talk to them and understand their business, we find out they’re actually going to be paid the currency in six months we’ll say ‘Why are you going for 12 months out?’” says Keith. “That’s simplistic case but that’s the process followed.”

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The substantial increase comes in addition to research suggesting that almost 150,000 businesses are more likely to pay their accounts late, as business-to-business payment days double the standard term.

“There is a real cash flow crisis and it’s clear that the current economic climate has created a number of challenges for businesses,” said Christine Christian, CEO of Dun and Bradstreet.

She suggests that businesses should be more proactive about managing collection to remain ahead of the game: “It’s no surprise that smart businesses have realised the critical role that their receivables play in effectively managing cash flow, so they’re acting to manage their collections accordingly.”

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“Labor’s Budget has missed the opportunity to assist Australia’s 2.4 million small businesses which are the key to Australia’s economic recovery,” he said.

Ciobo believes that they neglected to cover off one of the biggest problems facing small business – cash flow.

“Kevin Rudd and Labor failed in this Budget to help small business cash flow. For Australia’s 2.4 million small businesses, cash flow is their single biggest challenge, yet they’re expected to help pay off Labor’s record net debt of $188 billion,” Ciobo said.

He made particular mention of the Government’s increase in the Small Business and General Business Tax Break (Investment Allowance) from 30 percent to 50 percent, claiming that it will be of no use to small business: “Where are small businesses going to get the money to go and buy new equipment and machinery if they are under cash flow stress?”

Ciobo believes the Coalition’s six-point Small Business Action Plan is more in tune with the needs of small business as it provides “real assistance for small businesses” to give them the support they need “to lead Australia’s economic recovery”.

“The Coalition’s action plan offers a financial lifeline to struggling small businesses through incentives that will help boost cash flow, ensure businesses remain profitable, and reduce the costs of employing people so more people are the pay roll,” he said.

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Most small to medium exporters have less available security on their balance sheet, little no equity and find it difficult to get traditional funding from there finance provider, given their concentration on their domestic markets.

Depending on their agreed payment methods, small to medium exporters have different funding gaps. It is important that the small to medium exporter agrees with overseas buyers on the appropriate method of payment.

There are a number of methods of payment that a small to medium exporter should consider, all with a level of risk:
Prepayment: Remittance from the importer/buyer prior to shipment by the exporter/seller.
Documentary credit: Issuance of sight or term documentary letter of credit with payment by drawing under the letter of credit.
Documentary sight bill: Documents against payment (D/P Bill).
Documentary term bill: Documents against acceptance (D/A Bill).
Shipment on open account: Payment by the importer/buyer after delivery of goods.

Many small to medium exporters find it difficult to obtain traditional funding products from their financial provider because of these risks. In addition, small to medium exporters need to use their receivable book to access cash flow to grow their business in international markets.

Because exporters are pressured to compete in the international market and to provide the buyer with terms that are competitive in the buyers local market, they are often pressured to agree to open account payment terms—often with extended trading terms—creating cash flow constraints and higher risk of non-payment.

The better debtor
As an small to medium exporter you need to look at the whole supply chain to assist your cash flow requirements. Generating a strong cash flow in your domestic market can provide working capital to help grow your export market. Debtor finance suits businesses that need a capital injection to fund business growth or meet cash flow requirements and want to fund these objectives on the strength of their business sales.

Debtor finance is a facility designed to give your business access to funds based on the strength of your business credit sales rather than having a limit determined by mortgage-based fixed asset lending. Instead of waiting for your debtors to pay within your normal trading terms (usually 30–90 days), your financial institution will purchase your approved trade invoices and make available a percentage of the face value of those invoices generally within two business days.

Your daily available limit will therefore automatically increase and decrease depending on the level of your credit sales and debtor collections. When your debtors pay the invoice, you then receive the balance, less any adjustments.

The benefits are:
Funds access—you borrow money based on the strength of your business sales.
Flexibility—it helps you manage seasonal and day-to-day fluctuations in cash flow.
Convenience—you gain access to funds when you need it against issued invoices.
Relative limits—as your business grows and your debtors grow, so does your facility limit.
Accessibility—you can transfer funds from your debtor finance account into your working account via electronic banking, or by written instruction.

Debtor finance is subject to standard bank credit process and a higher margin applies to any amount in excess of your limit. Be aware that other fees and charges may apply depending on the product offered by different financial institutions.

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There are potentially tens of thousands of small businesses with a product or service capable of export that are not exporting and should consider exporting. In reviewing whether your business is ready to begin exporting, you should consider a number of important factors. One important factor is to assess whether you are in the financial position to actually pursue an export strategy.

Assessing your financial position
Assessing your financial position requires you to prepare and interpret financial statements—profit and loss, balance sheet and cash flow statements—and budgets, including cash flow forecasts. These base documents will allow you to assess your current financial position as well as your projected future financial position, with and without exporting. If you don’t already prepare and interpret such documents, your accountant will be able to help.

Knowing your financial position is vitally important before you put together an export plan. Your financial position will determine how much effort you can put into exporting, whether you need to move resources from another area, or seek additional finance. While your financial position should not dictate your plan for becoming export ready, it should be a vital consideration to assess the resources, time, skills and commitment you can devote to building an export market over a sustained period, typically between 12 to 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. The export plan should also set objectives against which you can measure performance.

The first step is to conduct market research on your current target export markets. Research will vary in cost, time and complexity, depending on the product or service, the customers’ needs, the country and the information and experience already available to you. Although you can do much of this research in Australia, you will still need to visit the market itself. Once you start to visit these markets, the costs will begin to rise as you confirm and fine-tune your research—one visit is never enough.

Cost of preparation
In preparing to become export ready, there are a number of other potential outgoings for which you will need to budget. These include the cost of participating in trade events, developing promotional material for different markets, developing a corporate and product profile, interpreting and translating services, product customisation, due diligence on potential partners, legal fees and so on.

It is important that your financial projections reflect the full cost of establishing and operating in a market, including your time and your employees’ time, so you can make an informed decision about cost.

Distribution channels
Once you have identified a target market, you need to consider how best to get your product or service into that market. Distribution channels include direct sales, licensing, agents, distributors, and so forth. Each of these distribution channels has different costs, benefits and risks attached to them, therefore as part of identifying the preferred distribution channel, you should do a cost-benefit analysis of the various options.

If you decide to work with a partner, part of your due diligence should include reviewing whether the potential partner has the resources to perform the tasks that you require.

Pricing
It is important to determine what price to charge for your product or service in a new market. The cost to you of getting the product to market, including the cost of any modifications, and the margin you want to achieve are not the only pricing considerations, but they will be the most significant considerations over the medium to long term.

While introductory prices are a tool to create interest and to build market share, you should test how successful your product or service will be if it priced appropriately, as this will be the price that you will want to sell at over the long run. Pricing should also take into account the risks of currency fluctuation, commissions and retainers payable to an agent and transportation cost.

You should also forecast your sales volume for given prices.

Before finalising your price, put your preferred price to whomever you are selling to and be prepared to bargain; do not simply chase any sale, chase profitable sales. Be careful not to be locked into selling at a fixed price as this transfers all the risk to you; make sure that you have the ability to pass cost fluctuations.

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As cash rate drop, business overdraft rates remain higher than ever. Business lending data from credit research service CANNEX shows the major banks increased rates on the most common secured overdrafts by approximately 0.51 percent, with typical commercial overdrafts now ranging from around 9.42 percent to 11.58 percent secured against residential property.

According to Greg Charlwood, Asia Pacific chief executive of global debtor finance provider Bibby Financial Services, this is making alternative cash flow products such as debtor finance more attractive to small businesses looking to bolster cash flow and secure funding for their businesses in a tighter credit environment.

“Businesses are more in need of cash flow funding in the current environment. We are receiving record levels of enquiries for debtor finance in 2009 and new client growth is running at 30 percent above 2008 levels for the first quarter. A significant amount of these enquiries are being driven by business owners and advisers looking to replace their overdraft rather than increasing limits.”

Charlwood believes there are many benefits of obtaining debtor finance for small business.

“Because debtor finance facilities are linked to sales, unlike overdraft facilities the limits are flexible so funding is better matched to the needs of the business, particularly for growing businesses,” said Charlwood.

Charlwood predicts debtor finance will come into its own in the current environment and become a financial mainstay for small and medium-sized businesses in the near future.

“We expect debtor finance will continue to grow strongly in 2009, fuelled by tighter credit conditions, slowing customer payments and tougher trading conditions. The need for strong, reliable cash flow is certainly underlined in the current environment.”

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