By Mark Dodd, head of international for Lloyds TSB Commercial
A survey commissioned by Lloyds TSB Commercial in 2010 showed that only 32 per cent of British SMEs are involved in the export market.
This is despite evidence that overseas demand is fuelling growth for firms that are already taking their goods and services to foreign customers.
While it’s important to take a cautious approach when entering new markets, it’s also vital that businesses don’t let perceived barriers stop them from exploring the potential opportunities that exist in other countries.
Here are 10 commonly asked questions about exporting:
Q1. Is now a good time to export?
Favourable exchange rates and growing markets in foreign economies are creating strong opportunities for UK firms with a unique and competitive product or service, making now a great time to export.
In fact, The Economist reported recently that over the next five years emerging markets are expected to account for over 50 per cent of global growth.
Weak domestic demand is also encouraging more businesses to look abroad for growth opportunities. In Lloyds TSB’s latest Business in Britain report, almost two-thirds (57 per cent) of companies questioned said weaker home markets pose the greatest threat to their business over the coming six months.
Q2. What are the key things companies need to think about?
Taking the first step towards exporting can be daunting, even for established companies.
Those wishing to target new territories should conduct extensive market research, make use of available guidance from bodies such as UKTI, and ensure they have the appropriate funding in place to support growth.
Thorough planning is vital and it’s important for firms to consider the wider impact of international expansion, such as additional pressure on resources and cash flow.
Q3. How should companies work out where to export to first?
Businesses need to first assess what features of their products or services might be attractive in new markets and then draw up a list of territories where (these might generate the most advantage because there is a gap in the market, or there is an opportunity to establish their product and service.
Growing economies such as China and India are the obvious countries to consider due to the potential levels of demand. But do not forget our traditional export markets in the USA and Europe where there may be ready demand for your products.
Making goods available online through websites such as eBay is a good way for firms to dip their toe into exporting and determine geographically where the demand lies for their products and services and test what aspects of your products sell most effectively.
It’s worth remembering exporters are exposed to less risk if the country they enter has an investment protection and promotion agreement with the UK, whereas territories that suffer from political instability, a poor infrastructure and a high crime rate can be risky options.
Q4. How helpful is it to have some sort of connection (family, friends....) with the place you're looking to export to?
Having links with a foreign country can give businesses the edge if they are able to use this connection to learn more about the market, its customers or existing competitors.
However, it is important not to export goods to a country solely for this reason - all the other components must also be in place.
Q5. Are any specific skills/additional resources needed to export?
Handling customs clearances, organising international shipping and transportation, and marketing a product in a new market can all require additional skills and resources.
By planning ahead firms can ensure they have the capacity and working capital to manage the export process and seek extra support if necessary.
Organisations such as UKTI can help you to assess what you need to prepare yourself for exporting to new markets.
Depending on the size of your business, you may wish to employ the services of a locally-based agent that can help you to enter a new market.
Q6. How important is it to have a plan? And what should a plan definitely cover?
Having a sound business plan in place is essential for any company targeting overseas markets. This should cover both the long-term objectives of a firm as well as their short-term goals and set measurable targets to help companies keep these aims at the forefront of their mind. The plan should have a clear assessment of what the financial requirements of opening up new markets will be. It’s a good idea to discuss these with your bankers well in advance so they understand your needs and help ensure you have the most appropriate financial support available to you when you need it.
It is imperative to prepare for every eventuality by being realistic and knowing what strategy the business will take if sales predictions aren’t realised or costs are higher than expected.
Q7. How important is it to research the market?
Securing new customers in any location carries a level of risk so taking time to mitigate these through thorough research is advisable.
For example, whilst your product might be unique in the UK, it may already be produced in other markets by foreign competitors. Will you be able to differentiate your offering on price or quality? Will your new customers need or want the product? Will they have the spending power to purchase your goods at your intended price point?
It is also prudent to check the tax treatment or legislation regarding the sale of goods or services in your target markets, otherwise you may find you are landed with additional charges you weren’t expecting.
Q8. Do you have any tips on managing payment methods and terms?
Implementing any expansion strategy in the current economic cycle can increase pressure on a firm’s finances.
If that expansion involves entering new territories then a strong level of working capital becomes even more significant as managing the lifecycle of international transactions can stretch cash flow.
The cost of sourcing raw materials, extended payment collection terms or working with suppliers who operate on a pre-payment basis may create cash flow ‘gaps’, which will need to be funded in the short term.
To manage cash flow successfully, businesses need to consider where they may incur additional costs and how these will be financed. For example, will shipping and delivery times have an impact on cash flow?
By planning ahead and creating detailed forecasting, firms can ensure they have the capacity and working capital to manage the export process and seek extra support if necessary, before their finances and resources become overstretched.
Talk to the International specialists at your bank early and get them to help you develop your financing plans to cover:
•Getting paid — deal with the risk your customer does not pay you when you expect
•Finance gaps in your cash flow
•Manage the risks such as Foreign exchange which can impact on either cash flow or profits.
Q9. How can companies make sure they're not exposed to, or that they minimise, currency fluctuations?
The worry of multi-currency trading can be off-putting for many firms but there are a number of ways to protect against currency fluctuations.
It involves building a strategy which will determine what actions you take in managing your foreign exchange exposures according to the amount of risk your business can afford to take and the length of time that you can expose the business to this risk.
Hedging foreign exchange risks can help to mitigate or reduce the impact of unfavourable exchange rate moves on an organisation over a given period of time. It may as simple as matching purchases of materials in the same currency as you are selling overseas to looking at using financial products to mitigate the risks.These may well be viable solutions for your business as they enable you to buy or sell a fixed quantity of a currency, for delivery on a fixed date in the future at a price that is fixed now. Again, speak to your bank early to get their support for managing the risk.
Unless you have income and expenditure that match in the same currency you will not be able to remove the exposure completely, however the below steps can help shelter you from significant changes:
•Recognise foreign exchange risk is dynamic — do not ignore it
•Regularly monitor actual outcomes against those you have planned for — do not be afraid to change an approach if it is needed
•Do not lose sight of the bigger picture — big moves in rates over time will have far greater impacts on outcomes than the rates at which foreign exchange is acquired
•Consult with your foreign exchange provider early — they have a wealth of experience, knowledge and information on these risks and the markets which surround them
•Do not speculate!
Q10. What groups and organisations can help companies trade overseas?
Getting the right guidance is vital and UKTI should be one of the first ports of call for firms as it provides invaluable advice for exporters, helping companies to develop their overseas strategy and build relationship with international partners.
Businesses targeting international markets should also draw on the support available from banks, accountants and solicitors to put themselves in a strong position to succeed.
At Lloyds TSB Commercial, we have international managers across the country that specialise in helping businesses involved in the export market and are on-hand to guide management teams on taking initial steps and beyond.