A LARGE proportion of businesses which export goods or services are classified as SMEs and many more smaller concerns can, with the right preparation, identify lucrative international markets.

There are therefore numerous small businesses with a product or service which are capable of exporting but which are not, and should consider so. Before exporting, however, you should become export-ready.

In reviewing whether your business is ready to begin exporting, you should consider a number of important factors. One of the most important is to assess whether you are in the financial position to actually pursue an export strategy.

Assessing your financial position

Assessing your financial position requires you to prepare and interpret financial statements (profit and loss, balance sheet and cash-flow statement) and budgets including cash-flow forecasts. These base documents will allow you to assess your current financial position as well as your projected future financial position.

Knowing your financial position is vitally important before you consider even putting together an export plan. Your financial position will determine how much effort you can put into your exporting effort or whether you move resources from another area or seek additional finance.

While your financial position should not dictate your plan for becoming export-ready, it should be a vital consideration as you must realistically assess the resources, time, skills and commitment you can devote to building an export market over a sustained period of typically between 12 and 18 months.

Export plan

After you have matched your exporting ambitions with the reality of your financial position, you need to develop an export plan as part of your overall business plan. The export plan should also set objectives, including financial objectives, against which you can measure performance.

The first step in such an export plan is to conduct market research on your current target export markets. Such research will vary in cost, time and complexity, depending on the product or service, the customers' needs, the country and on the information and experience already available to you. Even though you may be able to do much of this research in your home country, you will still need to make visits to the market itself. Once you start to visit these markets, the costs will begin to rise as you confirm and fine-tune your research, and one visit is never enough.

Other preparatory costs

In preparing to become export-ready, there are a number of other potential outgoings you will need to budget for. These include the cost of participating in trade events, developing promotional material for different markets, developing a corporate and product profile, interpreting and translating services, any product customisation, due diligence on potential partners/ agents, legal fees, etc.

Financial projections

It is important that your financial projections reflect the full cost of establishing and operating in a market, including your time and the time of your employees in establishing and the on-going management of the new market, so that an informed decision can be made.

Distribution channels

Once you have identified a target market, you need to consider how best to get your product or service into that market. Distribution channels include direct sales, licensing, agents, distributors, etc. Each of these distribution channels has different costs, benefits and risks attached to them. Therefore, as part of identifying the preferred distribution channel, you should do a cost-benefit analysis of the various options.

If you decide to work with a partner, part of your due diligence should include reviewing whether the potential partner has the resources (financial and otherwise) to perform the tasks that you would require your partner to undertake.

Pricing

It is also important to determine what price to charge for your product or service in a new market. While the cost to you of getting the product to market (including the cost of any modifications) and the margin you want to achieve are not the only pricing considerations, they will be the most significant considerations over the medium to long term. While introductory prices are a tool to create interest and to build market share, you should test how successful your product or service will be if it is priced appropriately, as this will be the price that you will want to sell at over the long run. Pricing should also take into account the risks of currency fluctuation, commission/retainer payable to an agent and transportation cost. You should also forecast your sales volume for given prices.

Before finalising your price, put your preferred price to whoever you are selling to and be prepared to negotiate. However, do not chase any sale, but chase profitable sales. Also, be careful not to be locked into selling at a fixed price as this transfers all the risk only to you, and make sure that you have the ability to pass through cost increases, and vice versa (for example, because of currency fluctuation).

Payment terms

Working out payment conditions for the new market is also important. The payment conditions should reflect not only the generally accepted terms of trade in that market but more importantly your cash-flow needs. You should also arrange the terms against which you are going to be paid, such as cash in advance, documentary letter of credit, bills of exchange, open account or consignment.

Exporting issues?

Once you start exporting, you will have further costs such as promotional campaigns, after-sales service, insurance, transportation costs and modifying product or services and packaging for a particular market.

You should also factor in lead times of getting the product to market and any minimum or maximum order requirements into production planning and cash-flow forecasting. If there is a long lead time of getting a product to market, the business may have to find additional sources of finance to meet any shortfalls caused by such delays.

You will also need to consider whether you have the capacity to meet increased demand and if not, how you can increase such capacity. Another consideration is whether you will have to keep a reserve of your product in the market - if so, this means that an increased percentage of your working capital is tied up in stock and you will have to factor in additional warehousing costs.

Risks

There are three main financial risks that potential exporters should be aware of. These risks are:

• Damage or loss of goods before payment
• Exchange rate risks
• Credit risk.

The risk of damage or loss of goods before payment can be mitigated by taking out marine or air-freight insurance. Credit risk can generally be mitigated through trade-financing facilities or other factoring products offered by banks and finance companies.

Businesses are able to mitigate exchange rate risks with a variety of specific market instruments, especially forward foreign exchange contracts (which will guarantee a fixed rate of exchange), currency swaps and currency futures and options.

An additional risk that should be considered relates to your intellectual property. You should take steps to protect your intellectual property through trademarks and patents in your target export market.

Review

Once you have started exporting you should review actual results against your budgeted projections. If you are well behind your projections, then you should seek explanations and, if necessary, update your forecasts.

If the updated forecasts show continued financial problems, then serious consideration needs to be given to abandoning exporting to the market. If you are well above forecast, then you may need to consider what additional capacity may be needed to continue to keep pace with demand.

This article was contributed by CPA Australia. For more information, visit www.cpaaustralia.com.au

This article was first published in The Business Times on December 23, 2008.