Managing Cash-flow & Key Working Capital Risks For Importers

iStock 57879866 SMALLConsider the following scenario.

The business is an importer of goods from China which are highly sought after. The business has placed a large order to ensure stock is sufficient for the festive season. The terms are agreed and supplier paid upfront. The manufacturing commences and the goods are completed, inspected then shipped. The container ship encounters major mechanical issues and is forced to re-dock for repairs which take several weeks. The goods are finally delivered but there are further delays in clearing customs. The business finally delivers the end product to the local customer and raises the invoice. The customer is on 30 day terms.

At this point, the business has had cash tied up for over 120 days. Consider how this cash might have been put back to work and what positive impact it might have had within this period.

Management of cash flow and working capital levels are amongst the highest priorities for any importer, and very often a key factor in a business’ poor performance or even failure. For businesses considering importation, the longer cash cycle can also create knock-on effects to the domestic supply chain.

Working capital management is absolutely fundamental to successful importation.

There are still plenty of things you need to consider as an importer. Understanding the relevant approvals, permits, tariffs and regulations is one element. Dealing with quality controls is another. Then there are the financial aspects of your undertaking. After all, you want to ensure you maintain healthy cash-flow and working capital as you import goods. Here are some key factors to consider:

Longer cash cycles
Cash cycles for importers can be long. Very long. Some suppliers insist on payment before they manufacture and ship, so your money can be tied up at that end. Meanwhile, some customers may not pay you for up to 60 days. Where does that leave you? Unable to access working capital to grow, that’s where.

There are ways around this, though. For instance, a flexible trade finance solution can allow importers to defer payment for goods for up to 90 days, freeing up working capital for other business needs.

Import risks and insurances
Unfortunately, marine shipping containers can go missing. So what happens if your goods don’t show up at the port, or they are seriously damaged? Many importers mistakenly think the freight forwarder engaged to facilitate import will take care of the insurance. They don’t. So it is important to discuss adequate insurance with your advisers.

Incoterms
When you seek to transact, it is critical you have a thorough understanding of Incoterms, the standard set of commercial terms published by the International Chamber of Commerce to communicate the costs, risks and tasks relevant to the transportation of goods. These terms will have an impact on working capital and it is critical that consideration is given to how it will impact on the transaction and your business.

Forex, transfers and other money issues
When you are buying goods, currency fluctuations can quickly and seriously hurt profit margins. You also need to ensure money transfers go smoothly and safely. To hedge this risk, importers should work with currency providers to set up forward exchange contracts that lock in an exchange rate.

Cash-flow shocks
Keeping cash flowing is essential for your business (and your family). But there are real pressure points within the process. These include long cash cycles (as mentioned above); needing cash to purchase large volumes of product; and overtrading (when you don’t have adequate cash to grow because your money is all going towards expenses such as rent and staff payments).

Trade Finance solutions can help
All of these problems may sound overwhelming, but by developing a plan with the help of experts they can be overcome. For example, there are some great trade finance options that do not require you to put up the family home as collateral or upset existing banking arrangements.

At Scottish Pacific Tradeline, one of our offers for SME importers is a line of credit to pay your suppliers, with a quick approval time. You can rest easy knowing sufficient working capital is in your business prior to importing, and that general cash-flow management is being looked after. It is amongst the most flexible and accessible forms of import finance available.

 

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