Why do you want to expand?
When deciding on whether to enter into a new market, the first question to be asked by a Sales Director or COO is why? What is the rationale behind deciding to sell to an overseas customer base? Does it make strategic sense for the business?
There are questions of political risk in international business which could preclude entry to certain markets. How stable is the Government? Is the opposition radical? Are there growing nationalistic feelings that could mean issues down the road?
Political risk occurs when the government of a country amends their policies which can impact the foreign side of your business. Some of these amendments that could contribute negatively include trading costs or other rules that prevent trading internationally such as trade barriers or tax fees.
The value of a currency can change at any time, this foreign currency exchange risk can result in a decrease in the profits returned. If the currency value in one country goes down, all the profits made in a foreign country within that time period will decrease in value when transferred back to domestic currency. Although this can also go the other way, it’s best to be aware that these fluctuations can happen and to be prepared.
Currency risk management
A new area that companies moving into an international presence encounter that they haven’t before is a specific vision for risk management. That is something that will be inherent to any manufacturing business, whether it is health and safety regulation or quality control.
Risk Management in international business is an entirely different matter and is a major consideration in any global expansion.
Saving money on research and development
In today’s globalised environment, it makes more sense in many cases to expand the reach of existing products rather than incur the research and development (R&D) costs of trying to develop new ones.
Business Risks in international trade are not to be underestimated but the research costs are a small percentage of those associated with research, design and manufacturing of a new product.
Are we able to identify risks? And when we do, can we control them?
Once a decision has been made that finding new international markets is the best method of expansion then the practical issues need to be dealt with.
Product quality concerns
Packaging, documentation, transport, language, sales and cost/pricing are major concerns. Can we sell to the end-user or do we need a wholesaler/agent? This of course depends on the product. The issues facing a firm selling the simplest of products are vastly different to those of a firm selling items which are fragile or sensitive to changes in temperature or humidity.
Overseas business risk
Overseas business risk comes in all manner of forms, but once the manufacture, sales, and delivery issues have been solved, the spotlight falls on the financial side. Are we invoicing in local currency or home currency? Is the currency of the country we are exporting to fully convertible without restriction?
Delays in making payments
Certain countries do not allow the free exchange of their currency and documentary proof is needed to make a payment. This can be fairly straightforward where there is a genuine transaction, but it can cause a delay in making a payment.
Is talking to your bank the only option?
Financial risk in international business comes in many shapes and sizes. Many CEOs, CFOs and Finance Directors will believe that the best place to start in mitigating those risks is to talk to their bank for international currency risk management advice. In the past, this would have been the case as banks provided a “one-stop-shop” for all financial matters.
Advice from a financial risk specialist
Today, that has changed and there has been a decentralisation of most matters, from pre-shipment finance to invoice discounting to currency hedging.The risks involved in international trade seem logical, but many businesses get caught out and it doesn’t pay to wait until the first shipment is delivered before finding out what they are.
The most obvious is the effect on the bottom line of receiving payment in a foreign currency; this is one of but not the only economic risks in international business.An expert in export documentation either as a consultant or full-time employee is a necessity to ensure that payments are made on time and without issue. An experienced CFO may not have to deal with overseas trade and will need to discuss his risk with a specialist in mitigating financial risk in overseas business.
At Currencytransfer our payment specialists advice in currency risk management, from explaining what products are available, to agreeing how to hedge the risk, but also to receiving and paying foreign currency.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”