Improving your international cash flow: managing foreign suppliers
Producing abroad or buying manufacturing inputs from overseas can provide lower costs, innovative products and other important benefits. If you don’t manage your foreign suppliers carefully, however, outsourcing can damage your cash flow, working capital and reputation by undermining your ability to serve your customers.
If your supplier’s quality control slips and the company sends you a substandard product, for example, you may face costly fixes during production and perhaps warranty claims later on. Or, if your supplier doesn’t provide your inputs when you need them, you may fail to deliver to your buyer on time, which can lead to lost orders and substantial late-delivery penalties. Any of these problems will negatively affect your cash flow.
In addition, it usually takes more time to deal with foreign companies than domestic ones. This means your cash will go out earlier for advance supplier payments and be tied up for longer periods before your overseas buyers pay you—especially when the latter demand extended payment terms. This further erodes your liquidity and working capital. In a worst-case scenario, your supplier may abruptly go out of business and leave you scrambling to find vital components or materials.
Using best practices to manage your foreign suppliers can reduce or even eliminate many of these risks.
Qualifying overseas vendors before ordering anything from them is a must. Your due diligence should include a careful investigation of their technology, products, delivery reliability, solvency and quality management. The Trade Commissioner Service can often help you here.
Monitoring suppliers is essential for making sure they remain cost-effective over time and continue to meet your quality standards, not only for products but also for services such as punctual delivery.
Assessing and mitigating risks, such as erratic or falling quality, should be an ongoing process. When a risk increases, you will know about it and can start corrective action immediately—if quality declines, for example, you can bring it to the supplier’s attention and collaborate or negotiate to deal with the issue. If the problem can’t be solved, you can find another supplier before the situation becomes worse.
Within this overall scheme, you can use various strategies to sustain your cash flow and working capital. The following are some of the most important:
Look at total landed costs, not unit price
A low unit price for a foreign input may be attractive, but it also may be much less than the landed cost, which is what you’ll actually pay. Landed costs start with the basic purchase price, but include charges related to transportation, inventory, insurance, warranties, customs levies, taxes and duties. Make sure you add them up before committing to a supply contract.
Managing input cost fluctuations
A rise in input costs after you’ve signed a contract with a customer can severely erode your cash flow. To avoid this, you can lock in your costs by buying the necessary inputs in advance, although you’ll have to balance this against paying the up-front and warehousing costs. Alternatively, you can establish fixed-price agreements with your suppliers to cover the duration of the contract. Fluctuations in currency exchange rates are a common cause of increased input costs. To deal with this, you can use hedging tools such as forward contracts, options and futures to match the currency of your inputs to the currency in which you will be paid.
Securing your inputs
If particular inputs are vital to filling an order, try to obtain guarantees from your suppliers to ensure that they will deliver the required quantities on time and provide the specified quality. Another approach is vendor-managed inventory. In this scheme, your supplier monitors your inventory of required inputs and automatically ships more when your inventory drops below an agreed level. The supplier doesn’t invoice for the materials until you’ve actually used them, which has a positive impact on your cash flow.
Managing supplier payments
Overseas suppliers will normally demand advance payments before they ship your orders and this will constrict your cash flow. However, a supplier may waive the advance payment and provide open account terms if you can provide a standby letter of credit from your bank. This frees up your cash and also protects you if the supplier fails to deliver, since you haven’t paid for anything up front.
Reducing duties on foreign inputs
If you qualify, there are a number of Government of Canada programs that may improve your cash flow by reducing or eliminating customs duties and/or taxes applied to your foreign inputs, such as: Duty Deferral Program, Export Distribution Centre Program, and Exporters of Processing Services Program.
Sourcing from abroad can be a great way to cut your costs and boost your bottom line. For financial tools to help manage suppliers, you can refer to institutions such as:
- Coface Canada,
- Euler Hermes Canada,
- Executive Risk Insurance Services Ltd.,
- Export Development Canada, and
- The Guarantee Company of North America.
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