While fluctuations in foreign exchange rates is perhaps the greatest risk for SMEs planning to import goods, businesses also need to consider how the transactions will be recorded, what impact dealing with foreign suppliers will have on their cash flow and what effect breaks in their international supply chain could have on their business.
Here are the top four things to consider before you start importing:
Foreign exchange transactions
In the 2016 Australian International Business Survey (AIBS) of internationally active Australian SMEs, respondents identified the possibility of adverse exchange rate movements as one of the top two risks to their international operations.
When dealing with international suppliers, you will usually be charged in US dollars, which means you will require a foreign exchange facility. It’s worth seeking advice from your bookkeeper or accountant as to the foreign exchange facility that will work best for you. Depending on the volume of your business, you may be able to negotiate dramatically reduced fees or even no fees for your transactions.
Fluctuations in foreign exchange rates have the potential to seriously harm gross profit margins. It is important for businesses to consider strategies to mitigate the impact of fluctuations, such as forward exchange contracts that lock in the current exchange rate or limit orders that trigger an order at a specified price.
Businesses need to have a thorough understanding of the accounting and tax requirements for recording foreign currency transactions. There will be a foreign exchange loss or profit that will need to be accurately recorded for the transaction. Recording the transaction in the incorrect currency or not at all will result in outstanding balances. This is a complex area and it is best to seek the advice of a financial expert before your business commences importing.
Impact on cash flow
Buying goods from an international supplier can have a markedly different impact on your cash flow than if you were buying from a domestic supplier. Longer cash cycles are generally involved, which will require businesses to have much greater levels of working capital.
Communicating with suppliers
In the 2016 Australian International Business Survey (AIBS), SMEs reported networking, local business partners and overseas employees with cross-cultural or language skills as the most important channels for understanding and operating in the business culture of their key international markets.
A break in the international supply chain through miscommunication or a language barrier between the business and its supplier can have a devastating flow-on effect for the business at home. While the issue with the supplier may be fixed, often the damage has already been done in the eyes of the customer. When dealing with international suppliers, it always pays to ensure you have open lines of communication as it is your reputation with your customers that is at stake.
About the author
Clive Barrett is the Executive Chairman of First Class Accounts, Australia’s largest financial support services franchise providing bookkeeping and finance.