Cash flow planning is one of the most important aspects of running any business, and it is particularly important for companies in international trade. It can mean the difference between success and failure. Without cash, businesses cannot pay their suppliers and employees, or meet their financial obligations to their lenders and shareholders.
Ensuring that the firm has enough cash or operating credit is a principal duty of the people responsible for the financial operations of the business.
This planning is usually done by means of budgets that set out a forecast of expected cash receipts, expected cash disbursements, and the calculated cash surplus (to be invested) or shortfall (to be borrowed) over regular intervals.
The budgets are prepared on a period-by-period basis (i.e., weekly, monthly, yearly, etc.); the period chosen depends on the detail available to the firm, the nature of the firm’s operations, and the reason for which the information is being prepared.
Cash flow planning for international trade transactions can be much more challenging than in domestic operations. This is because of the multitude of factors that can restrict the receipt of funds or lessen the value of the funds received. In particular, firms trading abroad must anticipate exchange rate fluctuations, transmission delays, exchange controls, political risks, and slower collection of accounts receivable.
Here are the top 5 factors and how they affect cash flow:
1. Exchange rate fluctuations
Exchange rate fluctuations can reduce the value in Canadian funds of the proceeds from a sale, or can increase the value of the funds needed to pay for a transaction. Unless planned for and controlled through risk management techniques, such fluctuations can seriously undermine expected cash flows.
2. Transmission delays
Transmission delays are an often-overlooked cost of doing business abroad, but they do affect cash flow. International shipments and the resulting payments are complex enough already; delays can slow the transmission of funds from the paying country to the receiving country by a few days to several weeks.
The cash budget must take into account the possibility of technical or bureaucratic delays along the payment chain.
The delays may be the result of improperly completed documentation, or they may arise from foreign administrative procedures. New exporters may be able to plan for the types of delays experienced in their domestic business, but they can be unpleasantly surprised when international business delays are far longer than they expect.
3. Exchange controls
Exchange controls can prevent or restrict the payment of funds by the trading parties in a particular country. Such controls result from the host government’s attempt to conserve its hard currency reserves.
Often enforced by a cumbersome and lengthy system of foreign currency authorization, these regulations impose more problems for capital repatriation transactions than for payment of arm’s length invoices. At times they can result in all payments being stopped.
This can have a devastating effect on a firm’s cash flow, and it should be insured against if the amounts involved are relatively large.
4. Political risks
Political risks can also severely affect a firm’s cash flow. For instance, the revocation of an export or import permit frustrates performance under an international trade transaction.
In the meantime, the exporter may already have covered the costs of arranging for the export sales or preparing the products for shipment. Such a situation will have an obvious negative impact on cash flow.
5. Slower collection of receivables
The slower collection of international accounts receivable can strain a firm’s cash position. To avoid this, care must be taken to select appropriate payment terms for each foreign buyer, and to factor likely delays into the cash budget.
If the receivables involved are substantial, the Canadian exporter should use export credit insurance or export receivables discounting facilities in order to avoid excess risk.
The factors listed above show how conditions of international trade can undermine a company’s cash position. Companies can take measures to reduce or avoid such risks, but only if they know of the risks in advance. Cash flow planning is the way for a company to identify possible problems and defend itself against them.