6 Ways: Export Business To Positive Cashflow

One of the two great challenges of being an exporter is having enough cash in hand to keep your business going. (The other is finding buyers for your goods and services.) Compared to a businessman who trades domestically, an exporter has to deal with longer delivery and payment cycles. This puts a strain on their cashflow, which can be defined as the money flowing in and out of their business. A delayed payment or a default can potentially sink an export business. This makes it critical for exporters to manage their cashflow well if they wish to be successful and grow their business.

In this piece, we will discuss ways you can achieve a positive cashflow in your export business, touching on the following subjects:

• What is positive cashflow and why is it important?
• What are the export risks impacting cashflow?
• What are the export challenges impacting cashflow? 
• Cashflow management best practices    

Read our guide to finding buyers for your export business here

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What is positive cashflow and why is it important?

When a business has a positive cashflow, it means it has enough money to deliver its products or services to its customers, pay its employees and suppliers, cover other expenses, reinvest in the business, and still have some left as a buffer against financial challenges in the future. Companies across the world have time and again acknowledged the importance of positive cashflow to the success of their business. According to the findings of a 14-nation survey conducted by HSBC during the Covid-19 pandemic in 2020, 41 percent of companies in India and 42 percent in Malaysia said maintaining sufficient cashflow was the most important factor for building business resilience. Similarly, 39 percent of the 253 chief financial officers interviewed in Singapore in a 2016 American Express survey picked ‘improving cashflow management’ as the top strategy to future-proof their businesses.       

When it comes to international trade, multiple factors can impact cashflow. Exporters must be aware of both the potential risks and challenges tied to the export business.

The risk factors   

Exporting comes with risks, which have a direct bearing on cashflow. What are these risks?  

• Risk of non-payment: It is not uncommon for an importer to delay or refuse payment. It might be because they don’t have the funds for it, have gone bankrupt, are in dispute with the exporter, or are no longer able to sell the goods due to a demand drop in their market. Delayed payments or defaults can severely impact an exporter’s cashflow and bottomline, especially if they have a narrow profit margin.           
• Foreign exchange fluctuations: Exporters who are paid in a foreign currency expose themselves to currency fluctuations. For instance, the exchange rate could fall between the time they sign the contract and the time they get paid by the importer. Exporters also run the risk of getting less money when they agree to receive payment in an unstable currency.        
• Other currency risks: Apart from fluctuating exchange rates, there are other currency factors to consider before exporting. Many countries such as India and China have government-imposed foreign exchange controls in place. These might include restrictions on the amount of local currency that can be sent out of the country or rules that require exporters to repatriate their foreign earnings within a specific time frame. Lack of awareness of such restrictions and regulations can lead to delays in payment, which would adversely affect your cash situation.       
• Country/political risks: Exporting to a country without knowing about its trade practices and business culture might prove to be a costly mistake. Exporters must watch out for unfamiliar laws and rules, changes in government policy that can have a bearing on your transaction, and going into business with unstable overseas banks. They must also inquire about the country’s import requirements, such as stipulated quality and safety standards, certification compliances for certain goods, and rules governing the shipping of hazardous substances. There are other country-specific risks to consider as well, such as war, insurgency, terrorism and piracy.     

• Additional costs: Even if you plan your exports meticulously, it might be impossible to avoid additional costs. These might include storage fees such as demurrage and detention arising from shipping and customs delays. You’ll also need to account for insurance, transportation, and documentation fees.

Read our series on extra charges associated with shipping here 

‍Access to finance – an export challenge   

Apart from potential risks, the export business is challenging for one major reason – the need for ready finance, which might not be easy to come by. In India, banks and formal financial institutions are often hesitant to lend to exporters, especially micro, small, and medium enterprises (MSMEs), due to their lack of adequate collateral. Easy access to finance is a long-standing demand of Indian exporters. Export finance is also vulnerable to economic crises such as the Covid-19 pandemic. In 2020, metal exporters in the United Stateswere forced to delay or drop shipments after insurance companies cut back sharply on export credit insurance, a type of export finance.     

The long wait between shipment and payment means exporters often need to tap external sources of finance. This is especially true for MSMEs who might not have ready cash reserves to fall back on. The external finance sources could be banks that offer loans, guarantees and other traditional products. Additionally, there is trade finance, which is an umbrella term for financial products offered by banks and other financial institutions to facilitate international trade. 

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Trade finance not only helps exporters maintain positive cashflow, it also reduces their risk of not getting paid. 

Maintaining positive cashflow is even more difficult for exporters working on growing their business. This is because they need more working capital. A larger contract, for example, will require more raw material stock. The exporter might also have to hire more workers. It is important to understand the various finance options available to you, and weigh their pros-cons and risks-costs to know which is the best fit for your business.         

To understand post-shipment credit, read our blog here 

6 best practices to achieve positive cashflow  

With a bit of planning and preparation, exporting can be a profitable venture and the inherent risks can be managed to a large extent. Here are some best practices that will keep your working capital in good health while trading across borders:      

1. Negotiate favourable payment terms: An upfront deposit, interim payments, or a shorter payment period are some payment terms that are clearly beneficial to exporters. So, too, is payment in advance, though most importers might not agree to such a one-sided condition. A letter of credit or documentary collection are not only considered safe bets but are also low-risk options for both the seller and buyer. Whatever the payment terms, an exporter must make sure they are clearly spelled out in the contract so that there is no room for confusion later on.         

Read about the 3 ways to ensure payment from your foreign buyer here

2. Prepare for currency risks: A fluctuating currency can mean that you end up getting paid less than expected. To avoid such a fate, you can ask to be paid a) in a stable currency, or b) at the present exchange rate when you receive payment at a later date. Alternatively, you can try to convince the importer to pay you in your local currency. This is the preferred option for most exporters. However, there is an upside to billing an importer in their own currency, especially if you do a lot of business with that particular buyer. According to the American export promotion body International Trade Administration, foreign buyers, in China for example, charge a currency risk fee when paying exporters in US dollars. An exporter should consider all these factors.                      

3. Create a cashflow forecast: Create a cashflow forecast for the period from when you receive an order up to the time you expect to be paid for it. To make such a forecast, you will need some information, such as your business expenses, cash inflows and balance sheets. A forecast is helpful because it shows if you have the resources to keep your business running for the entire transaction time. It also identifies periods when you will have more cash flowing out than in. You can then prepare in advance for any contingencies.  

Source: Export Finance Australia

4. Understand your financing options: Make sure you understand the finance options available to you, such as loans, letters of credit and export credit, among others. A conversation with your bank can be your starting point. You can also check out the websites of export credit agencies, banks, and non-banking financial corporations for the various trade finance products on offer. Many countries (including the US, India, and China) have an Export-Import Bank or Exim Bank, which acts as their official export credit agency. Their websites can be a valuable source of information. For Indian exporters who wish to avail of export credit insurance, they can reach out to the Export Credit Guarantee Corporation (ECGC) for information. When you ultimately decide to borrow money, don’t forget the implications of late payments or defaults and changing interest rates, which can affect your cashflow situation. Also remember, trade finance comes for a price and some products are more expensive than others.  

Click here for the 35 digital resources key to running an import-export business 

5. Get professional advice: Even when you do your homework on a contract diligently, you might miss out on a hidden problem. If it is a legal issue, it will be close to impossible to find a favourable solution in a foreign country with different laws. Have a lawyer with experience of international transactions construct your contract to avoid currency risks and legal hassles down the line. There are legal, accounting, foreign exchange and business advisers who can provide you with relevant information on trade compliances, rules and regulations, customs laws, tax compliances, licence requirements and so on. With their advice, you can significantly lower your risk of non-payment and avoid a cashflow crisis.          

6. Focus on creditworthiness: Mostexporters bank on borrowed funds to keep their working capital going. But financiers will not lend to an exporter who lacks creditworthiness. To ensure your business has a sound credit rating, you must have a well thought out export strategy and an efficient and transparent accounting system. Financiers will be more willing to lend to you if you have strong ties with reputed accounting and financial advisers as well. At the same time, it is equally important to check your buyers’ creditworthiness. In India, the ECGC helps exporters by providing them with information regarding the creditworthiness of foreign buyers. The export credit insurance provider also has a comprehensive risk rating for countries based on prevalent and predictive economic and political settings. This can be valuable for exporters planning to explore new markets.                           

By following these best practices and making them a part of your export strategy, you can avoid the risks and reap the full benefits of the export business – which include a larger pool of customers in diverse markets, and larger sales and profits.