By carefully researching factors and seeking specialist advice, businesses can optimise profits and protect their cash position, says Nick Farmer, a partner and international trading specialist at accountancy firm Menzies LLP.
A decision to step up a company’s export activities could have a dramatic effect on its bottom line in a relatively short space of time – driving sales and increasing profits.
But rushing into new markets without doing sufficient homework upfront, or without access to the right specialist support, could have disastrous consequences from a cash management perspective. What can UK businesses do to ensure their export drive is successful and sustainable?
Developing a clear understanding of the local business landscape, including tax and legal implications, combined with a commitment to good credit management, can help businesses to maintain a strong cash position whilst optimising value from their overseas trading activities.
For businesses planning to export their way to growth, overseas markets present both risk and reward. While expanding into new geographies can offer small and medium-sized businesses an opportunity to increase revenues and drive profitability by increasing their customer base, navigating an unknown legislative and fiscal landscape brings inherent risks.
Issues surrounding foreign currency exchange can also put pressure on the working capital cycle. With factors such as Brexit and growing global trade tensions on the agenda, exporting goods or services overseas could increase a business’ risk profile significantly. For these reasons, before deciding to step up an export drive, businesses must make sure they understand these risks and adopt strategies to mitigate any impact on cashflow.
Three-way forecasting can provide organisations with a clearer insight into their future cash position, allowing them to take steps to improve the management of cross-border payments. This technique involves combining information from profit and loss accounts, balance sheets and cashflow reports to create detailed financial projections based on a number of possible scenarios.
For example, controlling payment terms with customers could help businesses to alleviate pressure on cashflow in the short term and create a more sustainable operating model.
Deciding how far ahead to forecast will be influenced by the UK exporter’s strategic objectives. Ensuring that projections cover the entire trade cycle – from receiving an order through to taking payment – is a good rule to follow.
This will give senior managers an opportunity to spot potential pinch points in the working capital cycle and implement appropriate mitigation strategies before it’s too late. These measures might include renegotiating contract terms with customers or lengthening payment terms with key suppliers to ensure there is sufficient cash in the business to cover all operational overheads and allow sufficient funding for strategic growth plans.
Effective credit management can also play an important role in helping businesses to strengthen their financial position when trading internationally. As part of this process, business owners may wish to mitigate the risk of late payment by using Letters of Credit, which can guarantee they will receive payment.
However, it’s important to bear in mind that offering credit poses its own risks, and before agreeing such terms with a customer, businesses should carry out thorough credit checks. This approach should be combined with a careful review of the organisation’s credit control procedures and research into the support available to UK businesses trading internationally.
For example, as well as helping companies to secure overseas contracts and attractive financing terms, UK Export Finance works with banks to protect SMEs against late payment when trading internationally.
Another potential risk factor for businesses managing overseas payments is exchange controls. These may present problems for organisations looking to transfer local currency out of a particular market, for example, parts of Africa and Asia.
As well as conducting thorough research into local regulations and restrictions, it’s important to reach a clear agreement with customers about how any local requirements will be met, and make sure any knock-on time delays are accounted for in cashflow forecasts.
Another potential cashflow pitfall for businesses trading internationally is a lack of knowledge about the local tax landscape. While UK SMEs often try to approach overseas transactions in the same way that they might deal with them domestically, there are often significant variations. Failing to plan for this could lead to unforeseen costs, such as ‘withholding taxes’, which could erode profits and put pressure on working capital.
UK businesses need to address tax issues in an up-front way, otherwise they may be surprised to find that their overseas customer withholds taxes prior to paying invoices for goods or services. In some cases, customers may choose to do this even when there is no apparent reason, due to the fear that liability for any local tax underpayment could pass to them.
Another area where UK businesses may lack visibility is around international VAT programmes. With countries such as China recently establishing new systems, businesses without up-to-date information could find themselves liable for unexpected VAT on payments, which could have a significant impact on their cash position.
The message in relation to tax is that care should be taken from the outset to ensure that the tax implications are identified early and built into the terms of any trading agreement. If tax is to be suffered overseas, this should be considered during the sales negotiations, and possibly built into the pricing, so that the UK business is clear exactly what payment will be received and what the tax position will be in both the UK and overseas markets.
For businesses that get it right, expanding overseas can present the opportunity to seize new commercial opportunities and boost revenues in a relatively short space of time. However, without a thorough knowledge of local markets and the trading environment, SMEs could face unexpected cashflow pressures.
By carefully researching factors such as exchange controls and seeking specialist professional advice about local fiscal and legislative controls, businesses can optimise profits and protect their cash position – on the way to achieving their long-term commercial objectives.
