If you can’t make substantial profits from exporting then you may need to consider other ways to grow your business such as:
- expanding your product or service offerings to existing customers or
- tailoring your offering to appeal another type of domestic customer.
Complete a cash flow forecast
The export component of your business should be self sustaining as soon as possible. The best way to evaluate this is through an accurate export cash flow forecast.
A cash flow forecast will also help you:
- determine any gaps in your planning
- understand how cash is moving in and out of your business
- identify cash shortages in time for you to take action
- assess the feasibility and potential of an export market
- ensure you have the cash flow to manage additional financial commitment.
Prepare an export sales forecast
Resist the temptation to make top-down market predictions, such
as ‘5 percent of the population will buy my product,’ as this is almost never the case.
Research your estimates carefully and be cautious. Assess your competitors and their market share, your local customers and likely purchasers, and the marketing and promotion you are doing to drive sales. Create a number of cash flows; one outlining the absolute minimum you need to recover costs, and the remaining covering a range of best and worst case scenarios.
Pricing strategy
A clear pricing strategy is crucial to successful exporting and will impact on your sales forecasting. If you are too expensive you will end up with no sales. If you are priced too low you will either:
- sell everything and miss out on margin, or
- put off prospective buyers as they will perceive your product to be low quality.
Look at current competitor prices for your type of product or service. It may be hard to go above certain levels - ‘price points’. Price points are important clues to your ability to enter the market.
Allow for variation in shipping and stocking costs, as well as in-market and after-sales servicing costs as your market grows.
Your price should reflect your quality levels, delivery and promotion. It’s not easy to increase prices in a market or under a particular contract once you have agreed to deliver at a certain price.
Calculate prices
Pricing a product often means calculating two scenarios:
- Calculate the cost of getting your product to market by working out your actual production and distribution costs, plus a margin for profit. Will the market bear this price?
- Identify the selling price for similar products/services in the export market and work backwards to estimate a possible price at each level. Can you make a profit at this price?
To use one or both scenarios you may need to research the market and prices to find out what mark-ups or margins exist.
Download the Export pricing workbook below to help you calculate your price.
Identify monthly cash outflows
Estimate all your monthly operating expenses in the export market.
The main sources of cash going out will be:
- cash payments for stock purchases (note that if you buy on credit you will need to stagger the cash payments to the months you pay the bills)
- all other cash expenses such as wages, rent, power, drawings, and taxes paid etc
- advertising and marketing costs.
Initial set-up costs
Like any business venture, you may face a lengthy wait before seeing a return on your investment.
These initial costs can include:
- travel and market research
- in-market promotion, trade shows
- overseas travel, market visits
- establishing branding, packaging and labelling
- establishing new plant and production capacity
- set-up costs of an overseas office
- storage, premise leasing costs (New Zealand and offshore)
- employing additional salespeople, staff both locally and offshore
- training of new salespeople (employees and/or distributors)
- freight and customs compliance costs
- product modifications
- intellectual property and other legal costs (such as compliance in the source country)
- costs of meeting in-market product or service standards and regulations (eg working through testing regimes).
Product or service costs
You need to determine the actual landed cost of your product or service into the country in question.
You may have a good idea of your product costs within New Zealand, but exporting brings additional costs such as:
- freight and shipping costs
- product insurance
- internal transport costs
- wholesaler or agent margins
- storage costs
- security
- tariffs and other import taxes.
Freight and compliance
While freight is generally a cost you pass on to the end user in the product price, it is an ongoing cost that needs to be included in your cash flow projections. Depending on your chosen shipping method, each shipment will likely have an up-front freight cost that may take some time (possibly months) to recover in sales. There could be many separate freight charges on a shipment. For example, pick-up from factory to port, port to port, port to warehouse, warehouse to destination.
You will also need to provide required documentation on your products and shipments for customs export and the destination country compliance requirements. In most cases, filing export documents incurs charges.
A freight forwarder will charge for handling this documentation and pass on the costs they incur such as customs handling charges, insurance levies, tariffs or other taxes. Consult a freight forwarder or customs broker for help in this area.
Download our Excel spreadsheet on export cashflow forecasting.
Calculate the break-even point
Once you have researched your selling price, identified your costs and completed the cash flow forecast, you are in position to calculate your break-even point. This will help you assess whether exporting is feasible for your business at this time. It may also indicate the minimum quantities you need to ship (and the hours you need to work) to make the effort worthwhile.
You can compare the required break-even point (minimum quantities or minimum hours) with your research into the level of demand in the actual market. This calculation becomes especially important in working out the feasibility of exporting your product for two reasons:
- Is exporting profitable? Will you actually make enough money to make it worth your while? Are there any areas where you could trim costs or be more efficient? Should you increase your prices?
- Is it achievable? The smaller your break-even point is compared to the demand of the market, the more promising the opportunity.
Download the Excel spreadsheet below for calculating your breakeven point.
In summary, if you believe exporting will add significant value to your business through additional profits, then continue with the planning process.
