Wednesday, July 12, 2017

Four risks your growing business might face – and how to mitigate them

Risk is a part of business - it's unavoidable - but knowing the type of risk you might face will make you far more prepared to plan and navigate

All companies face risk of some description: it is the nature of being in business. Whether you are an SME exploring cross-border trade for the first time, or a larger corporate already engaging in overseas deals, a coherent approach to managing trade risk is vital.

Small companies often start their journey towards internationalization by importing only. As they become more confident they may seek overseas buyers and suppliers. Eventually many move towards overseas manufacture with international sales. Each step of the way introduces more risk.

It is important recognize that trade risk is a dynamic concept. Each and every business will have its own set of exposures and these will evolve. This is both a natural consequence of trade growth and a characteristic of operating in the real world. Managing risk should therefore reflect the ever-changing landscape.

The second step is to understand the risks you are likely to face.

Four major risks your business may face

Country risk. This is not a single concern but an assortment of risks typically associated with a country. The list is large and may include political risk, tax risk, compliance risk, exchange rate risk, economic risk, sovereign risk and transfer risk (otherwise known as `trapped cash'). The Organisation for Economic Co-operation and Development (OECD) publishes its Country Risk Classification several times a year to help readers assess individual countries at a high level.

Credit risk. This is simply the risk of your customer not paying invoices according to agreed terms. First-time trading means getting comfortable with a new overseas buyer. This may often be achieved through setting agreed limits but also consider risk-mitigation tools such as insurance, bank products such as trade finance, or support from a government export credit agency (ECA). International data providers such as Dun & Bradstreet are well-positioned to help you make initial credit-risk discoveries.

Currency risk. In the overseas trade context, the main threat is FX risk. When trading in a foreign currency, the agreed price for your goods is at the mercy of the exchange rate. This can be advantageous. But you could also face a financial loss. Quoting customers in US dollars will transfer the risk to your customer. If your competitors accept payment in local currency, you may have to do the same to keep the business.

Some companies may also find themselves exposed to commodity risk. This is where prices of oil or wheat, for example, can change quickly on the market. If the oil price goes up, your fuel costs will rise in line.

To minimize the risk, you might consider a forward exchange contract with your bank. The forward essentially fixes the exchange rate or the commodity price in advance so you mitigate the risk of rising prices. More complex versions are available but these demand a fuller understanding of the risks involved.

Other solutions might include a cross-border cash management structure such as cash pooling and sweeping, regional cash management or multi-banking. These tend to be for larger businesses.

Supplier risk. If you choose to use overseas suppliers, perhaps because it is cheaper and easier to reach new markets this way, you will face increased supplier risks.

These might include operational matters such as increased complexity in demand planning, quality control, and logistics. Continuity risks such as supplier financial failure, and strategic risks including those around reputation management and IP protection, are increased too. Certain locations may well raise social and ethical concerns such as health and safety within supplier facilities, local resource consumption, and even the use of child labor.

Singapore financial district


Connecting on-the-ground

While fully eliminating risk is not possible, it is well within the scope of most businesses to take mitigating action. If your bank has in-house risk expertise, discuss your plans with them.

Working with `relationship-led' teams in each country can provide the vital information you need to understand risk at a local level. By choosing a banking partner with an international network of on-the-ground country-based teams means it will be easier to harness support for cross-border risk management as your business expands.

HSBC, for example, has a 60+ country network of dedicated country-based teams as part of its commercial banking network.

Check the coverage

Look for a bank capable of financing your trade operations across your supply chain. Investigate whether help is available for suppliers in multiple countries (via programs such as Supply Chain Finance) and buyers (via trade credit). A local team will understand the needs of your local trade partners better than most. Ensuring supply-chain continuity through well-funded suppliers is as important as managing credit risk with buyers.

It's worth considering the breadth of client coverage of your bank too. If it offers broad service coverage -from small business banking to mid-cap, to full-fledged multi-national - clearly it will be able to service trade and risk needs across your entire evolutionary journey. If not, you risk outgrowing it and having to engage another provider.

Finally, keep in mind the available product set of the bank. FX and liquidity management, for example, are a core part of cross-border trade. If both FX and liquidity teams are pooled into a global structure, a clear real-time overview of your positions becomes possible. This is essential when managing risk, and when seeking to optimize your own financial performance metrics (particularly in terms of working capital management).

As your business grows it's critical to have a financial provider like HSBC who offers the footprint, and possesses the expertise and technology solutions to go along with you on your journey

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