Trading overseas? Keep an eye on your cashflow

Trading overseas? Keep an eye on your cashflow

The domestic economy is currently presenting a range of concerns to small- and medium-sized enterprises (SMEs) in Australia. A recent Western Union Business Solutions survey[1] revealed that 67% of SMEs engaged in international trade believe the Australian economy has deteriorated over the past 12 months. Furthermore, 54% of SMEs do not expect to see growth in their domestic business in the next six to 12 months.

So, when presented with a challenging domestic trade environment, what are Australian SMEs doing to stay profitable and grow their business?

The answer – seek overseas opportunities.

Today, the average SME importer/exporter trades with two countries; 34% have stated that this number has increased in the last 12 months. While it is extremely positive that Australian SMEs are being proactive in seeking commercial growth, they are leaving themselves exposed to unpredictable FX markets and a range of significant cashflow risks.

While Australian SMEs are being proactive in seeking commercial growth, they are leaving themselves exposed to unpredictable FX markets and significant cashflow risks.

So what can Australian SMEs do to mitigate these risks when trading overseas?

Know what you are paying & being paid

Over 70% of Australian SMEs do not fix the cost of their foreign invoices in advance and therefore only realise their true value when the payment is due or after payment is made. Thus they are unable to forecast their true costs, which can balloon quickly in volatile currency markets.

Taking this into account, it is not surprising that 35% of SMEs believe that FX movements have negatively affected their business over the past financial year.

To avoid payment shock, SMEs can implement strategies such as fixing rates with suppliers or hedging with their financial institution, which can provide valuable visibility and control over potential FX exposures.

When FX risks are managed properly, SMEs can enjoy improved control over profit margins, which will enable them to budget, purchase, price and sell with certainty.

Use your credit wisely

Many Australian SMEs are choosing to grow their business through international trade. However, with growing a business comes a need for cash. Whether it is for increasing inventory, staff or purchasing new equipment, cash is the essential ingredient for business growth.

However, with 49% of SMEs identifying credit availability as a challenge, many operators are putting their business at risk by dipping into their own reserves and leaving themselves cash-poor and vulnerable.

That being said, SMEs can grow and ensure they have a steady flow of capital through their business by securing a hedge credit facility to cover international invoices. Along with protecting working capital, a hedge credit facility can free up bank credit for growth initiatives, rather than wasting it on making up invoicing shortfalls.

There is no doubt that international trade can be lucrative, but as with everything, with great opportunity comes great risk. So be aware of the potential pitfalls, seek expert advice and, most importantly, manage your cash – it’s the most valuable asset in your business.

Adam Howard, Commercial Director, Western Union Business Solutions

[1] The research, conducted by East & Partners in June 2014, surveyed the international trade and foreign exchange practices of 2380 Australian SME that import/export in Western Union Business Solutions’ proprietary study. The research categorised businesses based on an annual enterprise turnover of up to A$100 million. Results of a second round of research in December 2014 will be published in 2015.

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