Here Are the Top Challenges (and Solutions) to Global Trade…
The temptation of overseas trade is compelling. From increased profits and diversified revenues through to (potentially) less competition; the internet and technology have made everything possible.
A business of any size can open its doors to a wealth of opportunity and address new markets and needs. Emerging markets account for approximately 59% of total global GDP (gross domestic product) and globalization is not merely a trend, but rather a necessary requisite for international expansion. The global exposure for your brand alone can deeply nourish your company’s credibility and provide further opportunities.
The Coronavirus crisis has propelled us into a new digital age and seen a huge shift in consumer trends. Many businesses are understandably keen to adopt first-mover agility, address the ‘new norm’ and diversify.
But before you expand into new countries and markets, there are several things to consider that may prevent issues and expense that can consume profits and leave your new global customers frustrated…
The Leading Lessons in International Trade
Overseas growth is tempting, exciting and daunting, all at the same time. Expectations are high and research is essential. How will it all work locally? What country laws must you abide by? How will you accept and make smooth international payments? How can you protect your bottom line when exchanging into your home currency? Considering everything ahead of time can prevent customer churn and protect cashflows.
Laws and regulations
Regulatory agents define unique and often changeable requirements for conducting business that you need to abide by. Different countries have different trade regulations and regulatory bodies. Trade regulations are laws between two countries that ensure a free and competitive economy, and your business will need to be set up and operate within the specified local parameters.
Import and export laws, restrictions, local tax laws – they can and will affect the products and services that you offer.
Every country you expand into will have unique laws, customs, and compliance. Guidance for import and export procedures for UK businesses may be found here. Trade spats are another thing to look out for and keep abreast of as they can hinder the movement of your imports and exports. It is good sense to do your homework locally, speak the language and research local merchants and laws.
If you place boots on the ground, you will need to familiarise yourself with local employment laws. Employment rights differ geographically as do employment law jurisdictions and protections.
Cultural and language barriers
A consumer-minded culture is expected from the start, including the local dialect and nuances. Does your website allow users to choose their preferred language and currency?
This builds trust and demonstrates your reliability as a merchant. Meeting your customers on their terms in their language usually reduces customer service issues and the demand for chargebacks – a hassle only deepened across international borders.
A solid footing in the local language is also essential when dealing with international merchants, reducing friction, and offering a seamless purchase and experience.
Cashflow and supply chain risk
Let’s say you purchase significant stock from China, but your shipment is held due to incorrect paperwork. It can be months not weeks before issues are corrected. It is not just increased shipping times and geographical distance that you must contend with. Local in-country, up-to-date knowledge of laws and import regulations, presenting all international paperwork correctly, and a solid grasp on the language can save you from a supply chain and cashflow nightmare.
It is prudent to review trading partners and their status as chasing any bad debt is much harder overseas. Perform credit checks, view international credit reports, and conduct due diligence in advance.
Just as the supply chain can be complex with UK exports, international manufacturing, and cross-border transactions; so too can your accounting, payroll, and tax. VAT is a big consideration as getting it wrong invites an unwelcome call from HRMC and potential fines.
Trading overseas can mean you are at an immediate disadvantage to the local competition. They do not have to contend with export tariffs, shipping rates, transactional costs, regulatory compliance, or exchange rate fluctuation.
Be sure to price your product or service properly, give accurate quotes, research market demand, and choose the correct terms of sale. Keep an eye on the competition to help you understand your competitive advantages and disadvantages. Go to trade shows, speak to customers, be flexible and informed with your go-to-market strategy.
Peace of mind
Peace of mind is not often included in the challenges of overseas trade but perhaps it should be. As a business owner, FD, CFO, or financial controller, taking the risks associated with international expansion can (quite literally) cause sleepless nights. Your reputation, customer satisfaction and profitability are at stake – all compacted by potentially adverse and unknown trading environments. At Central FX, we inject professional, expert, friendly knowledge that continually guides your business and aids smooth, calm sailing.
FX and operating in multiple currencies
Operating in more than one currency delivers a wealth of fresh opportunities and revenues until a less favourable exchange rate impacts your trade. Profits are immediately consumed, or you can even find yourself trading at a loss. What payment solutions will you offer and how will you keep up with real-time demands? How will you ensure funds are secure? How will you obtain the best rate and ensure profitability?
The ‘best rate’ is rarely one fixed number and sudden currency swings can be unforgiving on your business. International payments can often include several banks and intermediaries who apply charges as your money passes through.
Hedging allows your business to take control of its currency exposures by removing the uncertainties caused by sudden and unexpected swings in currencies and protecting your profits. Assessing, understanding, and mastering your currency risk is the only way to avoid “gambling with company profits” and protect your bottom line.
Don’t Just Manage Your Currency Risk – Master It
Trading overseas can start to feel rather complicated but with the right guidance and hedging strategies, many businesses are making the successful international jump whilst protecting revenues.
So, how can you become one of them?
The best way to manage your business is to guard against the risks associated with international trade.
You need to understand the unique risks to your business. Liquidity drives the market and dictates the buy/sell price in any given currency. An FX specialist will have unique and expert knowledge of the factors that dictate liquidity such as the economic and political climate and unforeseen events. The ‘best rate’ requires understanding the market and understanding your needs. Defining your risk is essential to implementing an appropriate strategy and the best rate.
A risk assessment tool defines your risk and quantifies your needs based on four key elements:
- Timing – When do you need to exchange one currency for another?
- The amount – How much are you exchanging (the more you exchange the greater the risk and need for hedging)?
- Margin – What is your profit margin? Smaller margins need to be correctly monitored and managed to prevent losses.
- Forecasting – How accurately can you forecast? The accuracy of your forecasting will determine your risk
You cannot manage what you do not know. Central FX offers a free Currency Risk Audit that informs your risk management strategy and helps protect your business from any significant currency swings. To book in a Risk Audit for your business, contact us today using the details below details.
Once your risk is accurately assessed and understood, it is time to create a strategy to meet your needs.