Now more than ever, companies need to find ways to grow or else the uncertain economy will swallow them whole. One great way to grow your business is to “go global.”
But, obviously, this is no small feat. You can’t just start shipping your products overseas and expect everything to fall into place. However, if you do your homework and follow a well-thought-out plan, you can take advantage of opportunities in global markets. Regardless of your company size or global experience, effective management of working capital throughout your global trade cycle is a critical success factor.
According to Gigi Moore, the senior vice president and national group manager of international trade finance for Comerica Bank, the global trade cycle — commonly referred to as ‘global supply chain’ or ‘physical and financial supply chains’ — represents the various stages of the buying and selling process among trading partners.
“Working capital requirements throughout the global trade cycle vary from company to company,” Moore says. “Some require solutions only for preshipment or post-shipment, while others require end-to-end solutions. It all depends on the nature of your business, your customers’ requirements and the financial resources available to your company.”
Smart Business spoke with Moore about the global trade cycle and what your company can do to expand globally.
When companies are considering global expansion, what should they know?
Through many years of experience, we understand that companies have four primary business goals: to optimize working capital, mitigate key risks, reduce costs and simplify their trade process.
The first step in accomplishing these goals is to create a global business plan and share the plan with your financial service provider. An experienced international trade finance specialist will help you to identify the global risks and select the payment options and financing solutions that make sense for your company
Even with the current slow business environment, it’s important to consider global expansion. Just selling domestically diminishes your reach, since 95 percent of the world’s consumers live outside of the United States. Don’t let this economic downturn keep your business from growing.
With declining trade flows, do companies need to be more concerned about risk mitigation?
According to the World Bank, world trade flows declined this year for the first time since 1982, declining by 9 percent, which is the steepest plunge since World War II. Even in this environment, companies are still participating in global commerce.
It’s a natural progression that during uncertain economic times companies will see higher risks. Greater protection may be required depending upon which country you are conducting business with and the experience with your trading partners.
Right now, some companies are facing commercial risks, such as insolvency or unscrupulous buyers, and political risks, such as economic instability or government restrictions, not to mention currency, transportation and foreign bank risks. And when there is a downturn in the economy, you want to have protection. Frankly, risk mitigation and working capital strategies and solutions should always be at the top of your list, regardless of economic conditions.
How can companies optimize working capital?
Working with your financial service provider to structure solutions to get working capital at competitive rates is paramount. For example, there are various financing programs sponsored by the government, such as the Working Capital Guarantee Program offered by the Export-Import Bank of the United States. The Working Capital Guarantee Program provides loan guarantees to banks willing to lend to exporting companies. The loan guarantee is secured against foreign accounts receivable, raw materials, work-in-process and finished goods inventory destined for export.
Additionally, when looking to optimize working capital, most companies think of days sales outstanding (DSO), which measures the time it takes a company to collect accounts receivables from credit sales. DSO is one of the best measures to determine receivable efficiency — the lower the DSO, the more efficiently a company manages cash flow. For example, some companies require letters of credit from their global customers. The letters of credit can include certain terms and conditions that result in extended terms for your customers while allowing advance payment for you upon shipment. By working with an international trade finance specialist, you can find ways to lower your DSO, which will increase your working capital and make it easier to export.
How can companies reduce costs and simplify the trade process?
Evaluate the various activities in your global trade cycle to determine if there are more efficient ways to conduct business. You should look for ways to streamline activities through automation and also prepare a comparative analysis of your global service providers. However, recognize that lower cost doesn’t always lead to the greatest value.
Companies that have the greatest success with managing their global trade cycle effectively, again, consult with professionals that have the expertise to identify the right solutions to help them achieve the four primary global business goals: optimize working capital, mitigate key risks, reduce costs and simplify the trade process. Your financial service provider can help you make good global decisions, and when you make good decisions, your company can benefit from global commerce.
Gigi Moore is the senior vice president and national group manager of international trade finance for Comerica Bank. Reach her at (313) 222-7031 or [email protected].
