CBJ Onsite: Logistics
Practical Approaches to risk and cash flow management in international business
Along the delicate supply chain that comes with conducting international business come risks. Amongst those business risks, anything that has an impact on cash flow can be the most detrimental to a company. This issue, The Canadian Business Journal attended an expert workshop put off by the Canadian Professional Logistics Institute.
Fergus Groundwater, a supply chain finance specialist now working with Export Development Canada, provided an engaging few hours of tips, ideas and strategies for keeping a positive cash flow in your business. As an exclusive to our CBJ audience, we have summarized some of those important points you must consider in your international business deals.
Know the risk
The increased revenue from conducting business internationally can be tempting. But Groundwater warns against entering into anything without a full risk analysis. Contacts with parties in different countries add an element of complexity and uncertainty. For example, there is a different legal system, and you are dealing with different currencies. “The reality is that people do business differently in different parts of the world,” says Groundwater. Smart businesses will make themselves aware of any of these potential problems long before signing a contract, and keep a careful eye on the terms and conditions of procurement.
Understand your cash conversion period
Cash conversion periods are increasingly long for International trade deals, up to 180 days is actually possible. As the gap widens, the need to maximize cash flow is more important than ever for Canadian businesses. “This is part of the price of entry in a global supply chain,” says Groundwater. So, while businesses should negotiate shorter cash conversion periods where ever possible, acknowledging that this is not always possible—and where the money will come from—is an important step.
A cash flow forecast is the first step a business takes when embarking into the risky realm of international business. This obvious step, however, can be approached in a different and more thorough manner than commonly practised. Forecasts, according to Groundwater, should be completed not only in Canadian currency but in each and every currency involved. “A cash flow forecast should be a modelling tool; a living document” explains Groundwater.
Trade compliance: become an expert
That critical length of time between signing a contract and receiving goods is dedicated to trade compliance. There can be definite complexities to understanding obligations, and it is important to properly classify products and determine rules of origin. These key questions can have a critical impact on duties paid, but “most organizations don’t have someone to do this,” notes Groundwater. There is merit to contracting third-party expertise for compliance management, as well as industry-specific custom’s brokers who know your business well.
Collaboration is possible
Traditionally they has been a disconnect between buyers and suppliers in the supply chain. ‘The problem is that organizations are often built in silos,” says Groundwater. Fortunately he also sees this mentality shifting with an increasingly global economy. As the need for working capital increases with entrance to international markets, buyers and suppliers are focusing more on working together for a common goal: eliminating costs.
With this cooperation, however, must come additional risk management by both sides of the equation. This can come in the form of “At every stage of the contract there is a risk mitigation tool,” says Groundwater, whether through advanced automation technology, added insurance, or specific contract stipulation.
Knowing that there are options available and keeping information current can lessen the likelihood of problems with cash flow. The key questions you have to ask are: ‘How much is the cost?’ and ‘Is it worth it?’ Framing all activities with those two ideas can lead to increased success in your international business endeavours.