A major challenge for exporters is having enough cash on hand to run their businesses. (The difference between exports and domestic market is that exporters have longer transit time and other expenses) Their cash flow is stressed, which is their inflow and outflow of cash. An export commercial enterprise can be destroyed if a payment is delayed or defaulted on. Therefore, exporters should handle their cash flow properly to succeed and grow their businesses.
Here we will discuss how to achieve a positive cash flow for your export business:
- What is positive cash flow and why is it important?
- How do export risks impact cash flow?
- How do export-challanges impact cash flow?
- Best practices in cash flow management
Why does positive cash flow matter?
A healthy cash flow is one in which a company has enough money to pay its staff and contractors, to cover other expenses, and to invest within the company, with enough left over to cover unforeseen financial challenges in the future. In recent years, companies have emphasized the importance of good cash flow to their success. Based on a survey of 14 nations conducted by HSBC during the Covid-19 pandemic in 2020, 41 percent of businesses in India and 42 percent in Malaysia cited maintaining good cash flow as a way to build enterprise resilience. According to the American Express survey, 39 percent of the 253 monetary leaders interviewed in Singapore picked ‘enhancing cashflow control’ as the best approach to future-proof their businesses.
There can be more than one element affecting cash flow when it involves global exchange. Exporters must know each of the capability risks and challenges associated with their enterprise.
Identifying the risk factors
There are risks associated with exporting, which impact cash flow immediately. What are those risks?
- Buyer default: It is not uncommon for an importer to refuse a payment. There is probably some reason for it, such as they don’t have the money for it, they’ve gone bankrupt, they’re in a dispute with the exporter, or they’re not able to promote the products due to a decline in demand in their market.
- Exchange rate fluctuations: Exporters who are paid in foreign currency are subject to exchange rate fluctuations. For example, their home currency can depreciate between the time of taking the order and getting the payment.
- Regulations Factors: Apart from fluctuating exchange rates, there are other forex factors to consider before exporting. In addition to India and China, a number of nations impose forex controls. Regulations can restrict the amount of local currency that can be shipped abroad or require exporters to repatriate their earnings within a certain time frame. The failure to recognize such regulations and rules might lead to delays in payments, which would adversely affect your cash flow.
- Risks associated with the country: Exporting to a country without understanding about its exchange practices and country’s financial health may turn out to be a costly mistake. Foreign exporters need to be cautious about unfamiliar laws and rules, changes in government policy that could have an effect on their transactions, and doing business with risky foreign monetary establishments. Additionally, they must research the country’s import requirements, including its quality and security standards, certification compliances for specific items, and guidelines for transporting dangerous goods. As well as war, insurgency, terrorism, and piracy, other country-specific dangers must be considered.
- Additional charges: Even in case you plan your exports carefully, it is probably not possible to keep away from extra charges. There may also be demurrage and detention because of delays in transportation or customs. Additionally, you will need to include the costs of insurance, transportation, and documentation.
Export financing – A Challenge
In addition to capability risks, exporting is difficult because of one basic reason – the need for qualified financing, which is now not easy to recover. Banks and formal monetary establishments are often unwilling to lend to exporters, particularly micro, small, and medium enterprises (MSMEs) since they lose good collateral. India’s exporters demand easy access to finance on a long-term basis. In addition to the Covid-19 pandemic, export finance is also vulnerable to monetary crises. U.S. exporters face a drop in shipments in 2020 after insurers drastically cut back on export credit coverage, a form of export financing.
As a result of long delays in cargo and fee methods, exporters need to tap outside sources of funding to close the gap. For MSMEs without sufficient money, the situation is especially serious. Trade financing helps exporters keep great cash flow and reduces their risk of not getting paid.
Since they want extra running capital, maintaining good cash flow is even more difficult for exporters. Additionally, the exporter may need to hire more workers. To know which finance choice is best for your enterprise, you should weigh the pros, cons, and dangers associated with them.
Six fine practices to acquire a nice cash flow:
With a bit of preparation, exporting can be a worthwhile undertaking and the inherent dangers can be managed to a great extent. Following are a few fine practices for maintaining your running capital in optimum shape even when buying and selling across borders:
- Negotiate beneficial payment terms:An advance deposit, in-between invoices, or a shorter transit time might be of actual value to exporters. In the short transit time, advance payment is favourable, although most importers won’t accept such one-sided terms. Letters of credit score and documentary series aren’t only considered safe bets, but are also low-risk choices for both the vendor and the purchaser. An exporter should ensure the payment terms are clearly spelled out inside the contract so that there will be no confusion in the future.
- Prepare for forex risks: A fluctuating exchange rate can result in you getting paid much less than you anticipated. If you wish to avoid this risk, you can ask to be paid either a) in solid currency, or b) hedge currency with your bank, the most popular choice for maximum exporters. There are benefits to billing an importer of their very own forex, particularly if you do a lot of business with them. According to the American export promoting agency International Trade Administration, foreign consumers, in China, charge a currency risk fee when paying exporters in US dollars. Many of these factors should be kept in mind by exporters.
- Create a cashflow forecast: Make a cashflow forecast for the time between when you receive an order and when you expect to be paid. You’ll need a few statistics as well as your enterprise expenses, cash inflows, and balance sheet to make this kind of forecast. The forecast is useful because it tells you if you have the resources to continue your business for the duration of the transaction. It also identifies periods when you may have more cash flowing out than in. You can then prepare earlier for any contingencies.
- Understand your financing alternatives: Understand the financing options that are available to you, including loans, letters of credit score, and export credit score, among others. You may also check out the websites of export credit score agencies, banks, and SUPPLY NINJAS BUY NOW-PAY LATER (LINK) for the diverse exchange finance merchandise on offer. There are a number of nations (including the US, India, and China) that have an Export-Import Bank Exim Bank, which acts as their legit export credit score agency. Their websites may contain a wealth of statistics. In India, exporters who wish to obtain export credit coverage can reach out to the Export Credit Guarantee Corporation (ECGC). You shouldn’t overlook the consequences of past-due bills, defaults, and converting interest rates if you decide to borrow cash in the long run. Also, keep in mind that exchange finance costs money, and some merchandise are more expensive than others.
- Get expert advice: While you do your homework on an agreement diligently, you may miss out on a hidden issue. If it’s a legal issue, it will be difficult to locate a useful answer overseas. A legal professional with experience in global transactions should draft your contract to avoid foreign exchange issues and legal hassles later on. You can find legal, accounting, forex, and business advisers who can provide you with information on exchange compliances, guidelines and rules, customs laws, tax compliances, license necessities, etc. You can dramatically reduce your risk of non-payment and keep away from a cash flow crisis when you follow their advice.
- Focus on creditworthiness: Exporters borrow money to keep their running capital going. Financiers won’t lend to exporters who has bad credit score. Therefore, your company must adopt successful export processes and have a transparent accounting system in order to increase your credit score. Having relationships with reputable accounting and monetary advisors may increase your chances of getting a loan from a financer. Similarly, checking your clients’ creditworthiness is equally important. Exporters in India have access to information about the creditworthiness of overseas customers through the ECGC. A total risk score is also provided by the export credit score provider for each country based on standard financial and political information.
When you follow those fine practices and make them part of your export strategy, you will avoid the risks and obtain the full benefits of exporting – including a broader market range, higher income, and greater profits.