First things first: Protect your cash!
It’s no surprise that when an event hits the whole world at the same time, every link in the chain feels the impact. Since March 2020 every business has had the same priority: protecting their cash.
Emergency government programs and relief measures put in place by financial institutions have kept a lot of companies afloat, but these are temporary fixes. The clock is ticking and any loans will have to be paid back sooner or later. When you need to keep your supply chain going, you notice how smart certain strategies that predate the crisis are.
Keep an eye on exchange rates
Planning is the name of the game. If you make large transactions in foreign currencies, you should go on using forward and futures contracts to set the date, currency and exchange rate of the transaction in advance. If you skipped that step and now you’re at the mercy of market fluctuations, you can still limit the damage.
For example, a few weeks before the crisis, a Quebec mining company purchased machinery for US$800,000. For a number of reasons, including the relative stability of the exchange rate over previous months, the company departed from its usual practice and did not use a forward contract. When the turmoil hit, the Canadian dollar fell and the company had to react fast. While the real cost of its purchase was skyrocketing, the company managed to limit the damage with the help of Desjardins. They escaped the worst of it with smart advice and quick decision-making.
Don’t get squeezed by lead time
The concept is quite basic: the importer pays, the exporter supplies. When delivery and payment are close together, risks are low. But things get complicated when there’s a lag of weeks or even months before you receive goods you paid for in advance. This can bring things to a screeching halt and cause serious issues for the company, which needs cash to operate. If a situation like the one we’ve experienced this year continues, the consequences can be severe.
Too often companies wait until after the contract is signed before discussing payment methods, which can mean the agreement is incomplete or poorly suited to the country where the transaction is taking place. It is important to explore potential avenues with your advisor before making anything official.
In addition to renegotiating payment agreements, a letter of credit is a great way to protect your cash flow without interrupting the supply chain. The importer and the exporter ask their respective financial institutions to represent them. The 2 companies send their terms to their financial institutions (see sidebar), which then make sure that all agreed-on terms are met before transferring the money between accounts. So when an exporter sends documents an importer has requested (such as the results of a third-party quality test) to its financial institution, the latter forwards them on to the buyer’s financial institution, which now has the information it needs to process the payment.
Documentary letters of credit: an invaluable tool
You are free to negotiate the terms of your contracts with your suppliers. Whether or not they are based on international trade rules such as Incoterms, the rules can still be reflected in the letter of credit. Here are a few examples:
- Organization and payment of carriage fees (sea, air, rail, road)
- Location, organization and fees for loading/unloading
- Insurance for the goods
- Responsibility for clearing customs
- Down payments
- Inspection reports
- Details in the event of logistics issues
This solution gives both parties peace of mind and provides a good foundation for the relationship. While letters of credit are especially helpful with new partners, they are also a simple way to add an extra layer of caution in uncertain times. The important thing is to give yourself some additional security when a foreign exporter requires payment in advance.
Relationships are everything
Chances are you can work it out
Take for example a Quebec steel importer with a long history of international transactions and strong, long-standing relationships with its suppliers. In normal times, this importer is responsible for carriage, including paying sea freight. But the pandemic has had a huge impact on the number of ships available: if one person on board shows symptoms, everyone has to quarantine and another shipping solution has to be found. The importer needs to negotiate an agreement with the supplier to try to manage these risks. In this case, the exporter and the importer found common ground: they added a clause to their contract saying that if no ship is available, the exporter will organize another method of transportation and the importer will pay for it.
A year ago this type of agreement would have been virtually inconceivable. Now is the time to put the good relationships you’ve been cultivating with your partners to work for the benefit of everyone.
There are a number of tools you can use to reduce risks for your company. Secure payment methods, quality tests, currency futures contracts, credit insurance—don’t skip any steps when the supply chain is tenuous and unstable. These are good business habits you should adopt as soon as possible and continue practising even after the pandemic.
Any help is welcome
Maintaining good relationships with your financial partners is just as important as with your suppliers and can be a big help these days. Your financial partners are a very valuable part of your support system who can pull in other experts to find the best solutions for your situation.
Start with your financial institution—it can be a huge help for international transactions. For instance, it can provide you with greater stability by firming up exchange rates in advance. Desjardins also has international trade specialists who can help you with a wealth of issues. They are available all across Quebec, in several other provinces, in the United States and in France. With 38 locations through our partner CIC Aidexport (part of Crédit Mutuel Alliance Fédérale), Desjardins can also assist you in more than 50 countries.
Other Desjardins partners such as regional export promotion organizations (ORPEX) help businesses in a variety of ways, including with market studies, export plans and grantwriting. EDC can also give you hand finding information on target markets, insuring your receivables or increasing your guarantees if you need to finance your export project.
Diversify your suppliers
Everyone knows you should never put all your eggs in one basket, and that’s even more true in times of crisis. If you have a broad pool of suppliers for the things your business has to have, you’ll be more agile and have greater peace of mind.
It can be a good idea to have different suppliers in strategic locations around the world.
Geographic diversification helps reduce problems related to transportation and changes in the health crisis from one week or region to the next. If you have a supplier in Italy, another in the States and a third in China, for example, you maximize your chances that one of them will be available and open at any given time.
Even if your Plan C turns out to be a bit more expensive than Plan A, you’ll be able to keep your business running when there is a hiccup in the supply chain. The more flexible you are, the better the chances you’ll receive your goods—and get them on time.
Solutions that are close at hand
When you’re looking for new suppliers, why not look this side of the border? If you’re not sure where to start, ask Desjardins. Our network includes more than 360,000 local businesses. You could do some networking and find the rare pearl of a supplier you’ve been looking for. There have also been lots of new businesses and products in recent years, so you may be surprised to find exactly what you need right in your own backyard.
That may prove beneficial both strategically and commercially. Say you already sell a product that is 45% Canadian content. If you can increase that percentage to 51% you can use the “Made in Canada” seal (conditions apply) and raise its value for consumers. Plus when you do business with Canadian partners, you no longer have to worry about customs or the thousands of kilometres between you and your profit.
No matter what your ideal scenario is, a good balance between local and international suppliers can play a key role in optimizing your costs and protecting your supply chain.
Track market trends
A good business strategy should put you in a position to act early and fast. With a good game plan and a seasoned team at your side, it’s much easier to make changes on the fly when opportunity presents itself or the situation requires.
Stay abreast of market trends and monitor them closely so you’re ready. If you’re part of a business association, discuss your challenges with others in your network. Talk to your sector-based association and reach out to your financial partners or even your competitors to get a good picture of the industry.
Despite the surrounding noise, stay attentive to your clients and watch consumer trends. You’ll be able to move quickly when it’s time to turbocharge your e-commerce platform or update your product line. Ultimately your ability to innovate and adapt your supply chain will be key to helping your business sail safely through rocky waters.
In times of uncertainty, there’s no magic formula. You need to be able to adapt and manage risks at the same time. Run a tight ship financially and operationally, but think outside the box about your processes. And whatever you do, be flexible. If you approach your challenges with an open mind and a good attitude, you’ll always be ideally positioned to seize new opportunities for your business.