Export is big business – and big risk. While the Department of Foreign Affairs and Trade (DFAT) notes that 2015-16 was a record-breaking year for trade with exports up 7 per cent, increasing output still means putting your business at the mercy of national and global economies.
Fluctuations at home and abroad can threaten even the largest Australian exporters, leaving them in a precarious financial position. By managing these risks, companies big and small can ensure their business model survives to grow with our overall export sector.
1) Foreign exchange shifts
Dollars fall, dollars rise. Whenever currency values change, the entire financial makeup of a company that relies on exports can be affected. Profit margins can disappear overnight when a dollar value shifts, as it becomes more expensive for overseas parties to buy Australian exports when the dollar grows in value. Currently, a depreciating Australian dollar has been beneficial for exporters.
In fact, in his June Monetary Policy Statement, Reserve Bank Governor Philip Lowe commented that an increase in the exchange rate would "complicate" matters for the national economy.
The Australian Trade and Investments Commission (Austrade) does have some guidance for exporters that wish to minimise their credit risk in the face of changing exchange rates. In particular, it suggests hedging with alternative investments and quoting all prices in $AUD – although this may be less than ideal for those buying exports.
2) Lack of payment
Dun & Bradstreet research shows that across Australia, industries are constantly improving their payment times – to the point where we are now at record levels of efficiency.
However, the risk remains for exporters that overseas buyers may not follow through with payment. You can counter this with both reactive and proactive methods.
Reactive: Ensuring clients conduct a pre-payment, or issuing paperwork like Letters of Demand or Irrevocable Letters of Credit. Austrade recommends asking your credit provider for guidance on formulating these.
Proactive: Shoring up your credit terms from the outset. Trade credit insurance can protect exporters from non-payment effectively, while outlining strict credit terms can mean exporters only establish agreements with relatively stable buyers.
3) Political instability
Greece. Brexit. Trump. Every year there's a new economic upheaval that threatens to shake the foundations of Australia's exporters.
Every year there's a new economic upheaval that threatens to shake the foundations of Australia's exporters.
Elections often create economic instability, as there is uncertainty about who will be in power in a few months and which policies will be enacted. Trade embargoes and legislative change can prevent export and import between two countries – something we can currently see in the Trump administration's sanctions on trade with Cuba.
While economies will survive regardless of who sits in power, political instability can still have a profound impact on a company's capacity to export. Mitigating this risk can be difficult, but strong business information reporting and thorough analysis of potential political impacts can help businesses avoid the worst of an upheaval.
4) Legislative differences
While changing legislative landscapes fall under political risk, differing laws in general pose their own financial threats to exporters.
As Austrade points out, product liabilities and consumer warranty laws can be wildly different between countries. Responsibility for safe passage of products, best practice payment times, and dispute resolution can be approached from varying angles – when exporter and importer are not on the same page, it can be costly to bridge the communication gap and re-establish a working relationship.
In this case, trade credit insurance may only go so far (although it's certainly a wise decision for anyone entering a trade agreement). Professional legal advice may be the best way forward to ensure legislation lines up for both parties involved in an export.
For many exporters, quarantine risks will be non-existent. But with Australia's high volumes of consumable and degradable exports, quarantine protocols must be considered a financial roadblock. Australian Bureau of Statistics data for April 2017 lists Australia's biggest rural exports as meat, cereals and wool.
If your goods don't pass through foreign customs, you can be losing a significant amount of money.
These will often fall under the purview of strict quarantine controls – if your goods don't pass through foreign customs, you can be losing a significant amount of money. Most companies already have everything they need in place to handle this, but SME exporters new to the process could struggle.
Austrade's International Readiness Indicator is a prime resource for managing quarantine risks as an exporter.
Prevention, as always, is the best cure
Rather than a wait-and-see approach to the financial risks facing Australian exporters, businesses should be proactive and ensure their credit terms, products and research are all up to speed with destination countries.
To mitigate risks in any export agreement, trade credit insurance can be the key. By covering you for non-payment over a set period, exporters may be better-equipped to weather financial storms that come with instability or poor trade agreements.
Coface is a global company that specialises in protecting businesses against exactly this kind of risk. To protect against big risks and turn into big business, talk to our experts.