First in our series on 'The True Cost of Exporting',Gavan Ord explores how to become export ready, along with the costs incurred along the way. 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.
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 riskThere 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