Nick Farmer – International Tax partner
Expanding a company’s export activity could potentially drive sales and dramatically increase profits relatively quickly. However, without conducting the necessary research and having the right specialist support, entering new markets could have devastating consequences to the business’ cash position. So what is the secret to a successful and sustainable export drive?
In order to optimise value from overseas trading activities while still maintaining a strong cash position, it is important to combine a commitment to good credit management with a clear understanding of local business landscapes, including tax and legal implications.
Small and medium-sized businesses can boost revenue and profitability by increasing their customer base while expanding the business’ activities to overseas markets. However, these unknown legislative and fiscal landscapes also bring inherent risks, such as foreign currency exchange issues putting pressure on working capital or factors such as Brexit and growing global trade tensions, increasing their risk profile significantly. For these reasons, in order to reap the rewards and reduce the risks of stepping up an export drive, businesses should ensure they understand the potential consequences and adopt strategies to mitigate any impact on cashflow.
By combining profit and loss account, balance sheet and cashflow report data to create detailed financial projections based on several possible scenarios, three-way forecasting is a valuable technique for businesses to gain a better insight into their future cash position, which in turn will help them improve cross-border payment management. For example, a more sustainable operating model could be created by controlling payment terms with customers and thus relieving pressure on cashflow in the short term.
Although the UK exporter’s strategic objectives will certainly influence the length of any forecast being made, including the entire trade cycle is always a good idea. Creating projections which cover the time it takes between receiving an order and taking payment, allows senior managers to spot potential weaknesses in the working capital cycle, giving them the opportunity to implement suitable mitigation strategies before it’s too late. Renegotiating contract terms with customers or extend key suppliers’ payment terms, might be needed to ensure sufficient cash is available to cover all operational overheads and allow the business to fund their strategic growth plans.
When trading internationally, effective credit management can also help strengthen a business’ financial position. By using Letters of Credit, business owners can increase the likelihood of receiving payment on time. However, to mitigate the risks linked to offering credit, a business should conduct a thorough credit check before agreeing any terms with customers. In addition, the organisation’s credit control procedures should be carefully reviewed and the support available to internationally trading UK businesses should be explored. UK Export Finance, for instance, works together with banks to protect SMEs which trade internationally against late payment and helps companies in securing overseas contracts and attractive financing terms.
Exchange controls are another potential risk factor for businesses dealing with overseas payments, in particular for those looking to transfer local currency out of certain markets such as, parts of Africa and Asia. In these situations, local restrictions and regulations should be researched, clear agreements with customers on meeting local requirements should be made and cashflow forecasts should account for potential knock-on time delays.
Cashflow of businesses trading internationally can also be negatively affected by insufficient local tax landscape knowledge. There are often significant differences in the way overseas transactions should be approached. Unforeseen costs, such as ‘withholding taxes’, could be the result if this is not taken into account, leading to profit erosion and putting pressure on working capital.
To avoid any unpleasant surprises, it is important for UK businesses to address tax issues up-front. Customers might be withholding taxes prior to paying invoices, due to the fear for any local tax underpayment liabilities being passed to them. Also international VAT programmes are an area where UK businesses frequently lack visibility. When organisations are not up-to-date with recent developments, such as China establishing new systems, this could lead to unexpected liabilities for VAT on payments, which might significantly impact their cash position.
The all-important message in relation to tax, is to ensure that potential tax implications are identified in advance, giving the opportunity to build them into the terms of any trading agreement. To have a clear understanding of what the tax position will be in both the overseas markets as the UK, businesses should consider overseas taxes being suffered when negotiating sales and establishing prices.
Expanding overseas can give rise to new commercial opportunities and increased revenues in a relatively short space of time, when done correctly. However, SMEs could also face unexpected cashflow pressures caused by a lack of local markets and trading environment knowledge. With proper research and professional advice about local fiscal and legislative controls, profits can be optimised and long-term objectives can be achieved while still protecting the business’ cash position.