Importance of Adequate Financial Planning in International Trade
Good financial planning includes a comprehensive and objective analysis of your financial situation as well as an action plan and recommendations that can help you enhance your wealth and achieve a certain level of financial independence. Adequate and timely financing can help in:
Define financial objectives;
Draft personal budget and analyze your current status;
Evaluate your needs and your future livelihood; and
Determine the financial and fiscal strategies that will allow to manage the assets and liabilities efficiently while maximizing net worth.
Risk Associated with international finance
PAYMENT RISK
Payment risk can be a threat in the international market and often stems from lack of knowledge about a foreign buyer’s creditworthiness. To mitigate this risk, a company must know what its trading partners are doing, whether they are meeting their obligations, when payments will be received and when it must meet its own financial obligations. Often this will come down to the mechanics of doing business in a foreign market, such as how to get paid.
CONTRACT PENALTIES
Late delivery penalties (sometime referred to as liquidated damages) are common in global trade, and if you miss your delivery window it can cost you a substantial sum. In capital goods manufacturing, for example, these penalties are typically 1% per week, and can be applied not only to the late delivery of goods but also that of other elements such as key documents. This can wipe out your profit on a deal, so it is very important to understand the contractual provisions for late delivery and similar events, and the effects they can have on your cash flow if things go wrong.
PERFORMANCE RISK
This can arise from an inadequate knowledge of foreign suppliers, which makes them difficult to manage. Obtaining goods or materials from low-cost countries, or manufacturing goods in them, may also be riskier for your cash flow than expected. Inflexible logistics and the costs of inventory and transport in these markets may cause problems, and you may need longer lead times to deal with these additional risks. As a result, your cash may go out earlier and be tied up for longer periods, further restricting cash flow. Other supplier performance risks include late delivery and poor quality.
FOREIGN EXCHANGE RISK
Foreign exchange (F/X) risk can arise when your cash flow is denominated in more than one currency and can lead to substantial losses (or gains) due to currency fluctuations. Many Canadian firms engaged in international trade don’t bother to protect themselves from F/X losses, but the repercussions can be severe if you fail to take this precaution.
TRADE COMPLIANCE RISK
Trade compliance involves paying close attention to the customs and regulatory requirements of your target market. This is important at all phases of the transaction flow since compliance requirements exist throughout the process. Noncompliance can cause significant problems ranging from delayed deliveries to fines and even criminal charges.
Interest Risk
Changes in interest rates can greatly affect your business, regardless of whether it is international or domestic. In an international arrangement, reference interest rates such as Libor or Euribor may change drastically, and when combined with changing exchange rates, can definitely impact your bottom line. Mitigate this risk by finding a financial adviser who knows international business and is a specialist in the markets, currencies and areas you are interested in.
Taxation and Customs
Don't assume that tax laws are the same in all countries. Instead, learn and plan for the differing laws. Customs laws can lead to an increase in costs due to delays and restrictions on merchandise. Each time that goods pass through a border they may be taxed and some countries do not allow certain products to cross their borders without correct documentation.
Mitigating
