The blog below is one in a series of 5 on internationalization of SMEs. It is written on a fictional case study and is linked to the storyline below.
Storyline
Stef (44) is founder and CEO of Soil Improvement Technologies B.V. in Foxhol (hereafter SIT). The company has grown over the last 5 years to become 1 of the 3 leading parties in the Netherlands involved in soil composition analysis in the agricultural sector. The company develops, assembles and sells test kits directly to customers (B2B only) in the Netherlands. These consist of agricultural and arable farms but also partly to professional fish ponds. SIT has 8 employees and realizes an annual turnover of € 1.2 million and a positive result after tax of € 75,000. Growth is leveling off and pressure on margins is growing. Stef is considering entering the foreign market. He spoke to two German distributors at the agricultural fair in Hardenberg who responded enthusiastically to SIT's SOILAN analysis kit. SOILAN was developed in-house and introduced to the Dutch market as of September. Because Stef speaks good German, Germany seems the perfect place to start selling SOILAN. SIT has a simple Web shop, where buyers can order products through personal access.
We're going international! Coincidentally, by Jan Martin Timmer
As the DGA of Soil Improvement Technologies B.V. (SIT), Stef sees domestic sales of his products stagnating. Margins are also under pressure. Internationalization of activities seems a logical step. There is concrete interest in the SOILAN test kits in Germany and Turkey. There are fewer competitors there and the market as a whole is larger.
Centipede in internationalization!
Internationalization requires a lot of effort and adaptation. There are many things that are going to require Stef's attention, for example:
- determining entry strategy;
- testing of international partners;
- Recruitment and selection of new employees (internationally oriented);
- adaptation of the various processes;
- marketing;
- logistics (internal and external);
- legal issues, etc.
There will be a huge demand on the flexibility and focus of Stef and his team. He will need to be a true jack-of-all-trades during this period to keep the ship on course while successfully rolling out internationally. In practice, we often see that during this troubled period, sales decline a bit and costs far outpace the well-known benefits. The question is: how does Stef now ensure that he gets through this period financially well?
Cash is King!
"The money seems to be evaporating!" We often hear this from entrepreneurs who start exporting. If domestic sales already remain at the same level then the first start-up costs with internationalization soon present themselves. Here you can think of marketing costs (see also Frank Booij's blog from Tuesday, January 26, 2016), IT costs, research and travel costs, etc. Especially with existing small margins, this can put the company into liquidity problems.
By drawing up a cash flow prognosis, Stef gets insight into the expected tension on the account at the bank. A cash flow forecast is an overview of revenues and expenses that are expected for a certain period. This is often drawn up on the basis of a monthly view and then covers a period of 24 to 36 months. Drawing up such a budget only makes sense if you know from which financial position you are starting, in short: always know as a company where you stand financially.
Tip 1: Know where you stand
As an entrepreneur, always know where you stand financially, even if you are not yet exporting. Make sure you prepare a quarterly profit and loss statement + balance sheet. Assess whether your organization has sufficient financial strength to take the step to export. Do you have sufficient basic sales, what is the quality of your current customer portfolio, how are your debtor terms doing and do you have costs well under control?
Payment habits by country
Every country has slightly different payment habits. Although the world is becoming smaller and smaller, cultural differences, technological differences, a different historical perspective and different laws and regulations in the intended export country continue to have a major impact on the cash position of the exporting company. It is therefore important for Stef to delve into these in advance.
Tip 2: Delve into the payment habits of the exporting country
Banks often employ specialists who are engaged in advising internationally operating companies. Advice on international payments, cash management and identifying opportunities and risks related to payments. Also talk to fellow entrepreneurs who have experiences in the export country in question.
Risks
Exporting brings opportunities! Opportunities also bring risks, also for Soil Improvement Technologies. Risks are fine if it is clear where they are located and to what extent they can (should) be managed. In payments and cash flow management, this is no different. Consider, for example:
- default risk;
- currency risk;
- interest losses;
- local laws and regulations (affecting payment transactions);
- commodity (oil) prices;
- etc.
Various financial institutions offer expertise and appropriate products to keep the risks manageable; of course, this comes at a price. For the above, the solution could lie in:
- Factoring (debtor risk). Factoring is a form of accounts receivable funding. A business owner transfers his invoicing and accounts receivable risk to a specialized company, the factoring company. In exchange for a fee to this company, the entrepreneur receives his money immediately. Thus, he does not have to wait until his invoices are paid.
- Doing business in 1 currency (currency risk), for example the € or $ or using currency options (agreement with the bank at what rate at a certain date foreign currency may be bought or sold).
- Netting of various accounts (interest loss).
Tip 3: Delve into risk management.
Examine the risks in the area of payments and cash management. Where necessary, try to find an appropriate solution to these.
Timely identification of your expected cash positions
Now that Stef knows where he stands, he can look well into the future. Common farm sense should take him a long way in this regard. At what points does his business actually receive sales? Not just the initial sales, but also look at how long it takes for payment from customers in general to arrive, or does Stef prefer to have them pay in advance? What costs is he running into and when should these expenses be incurred? Does he perhaps need to hire additional employees? Or should he have employees retrained. In any case, one piece of advice to Stef is to start taking inventory as soon as he is seriously considering exports.
Tip #4: Start on time!
Don't wait to draw up the financial picture until the first costs appear. Start as early as the time when you are seriously considering exports and preliminary research has yet to begin.
Tip 5: Establish a liquidity forecast, from a common sense farmer's point of view
Draw up a liquidity budget for the next 24 to 36 months and discuss it with your financial sparring partner if necessary. Make sure you make sense of these details; after all, it's your business!
Forms of funding
Stef has worked out the liquidity budget and now it is becoming clear how much additional capital is needed to successfully complete the international rollout. It is important that he weighs up what type of capital will be appropriate for this. What kind of capital? Yes, there is plenty of choice. The bank is the most familiar, which is often the first thought with existing companies. However, Stef can also look elsewhere to see if there are advantages.
Tip 6: Consider stacking funding products.
Internationalization requires financial effort, and the extent of it depends very much on the size and nature of the business. Funding needs can be met in a variety of ways. In doing so, look for a degree of flexibility or choose value-added:
- Current account facility (being able to go into the red in your business account up to a certain limit). Bank. Flexible. Relatively inexpensive (you pay interest on outstanding balance). Bank will require collateral.
- Medium loan (loan where the loan amount is paid out in a lump sum and where a fixed repayment schedule is agreed in advance). Bank / friends / family / other. Fixed amount, not flexible (fixed term). Bank requires collateral.
- Factoring (factoring is a form of accounts receivable funding. An entrepreneur transfers his billing and receivables risk to a specialized company, the factoring company. In exchange for a fee to this company, the entrepreneur receives his money immediately. Thus, he does not have to wait until his invoices are paid). Through a factoring company. Only with business-to-business. Advance debtor coverage. Saves part of administrative work, does require certain turnover due to costs.
- Subordinated loans (a subordinated loan is a loan in which the creditor is subordinated in the event of the debtor's bankruptcy: the subordinated creditor thus comes after the unsecured ("ordinary") creditors such as employees and banks in a bankruptcy in the order of creditors. Subordinated loans do have priority over shareholders and partners. Subordination can be achieved by contractually agreeing this). Private equity firms / informal investors / investment funds / friends and family. Higher interest rate. Bank often likes to see this, is positive for solvency ratio. Not flexible (fixed term). No collateral to give.
- Participation (investor buys part of your company). Informal investor / private equity firms / strategic investors / investment funds. Shareholder has control and often brings knowledge and network. Can be an expensive or a cheap solution, very much depending on added value.
- Crowdfunding (many small investors together provide capital to a company. This is organized by so-called crowdfunding platforms). Crowdfunding is also partly a marketing tool. Used mainly for business-to-consumer. Conditions vary by platform, be well informed.
The above is a sampling of the most common forms of funding and is not complete. The description behind the form is not complete but gives the main features. Often forms of funding are combined. This is then called "stacking."
The financial policy / financial organization
Exporting affects the company's financial policy. After all, transactions will become more complex and there is a good chance that more people within the company will be (partly) involved in them. No matter how small the company, it will have an impact on the financial organization.
Tip 7: Pay attention to financial policies.
Through exports, SIT will hopefully grow. Transactions may become more complex and increase. The number of customers and therefore debtors will also increase. Stef will have to deal with currency management, liquidity management, international contract processing, etc. He could, for example, use the model below to review his financial policies and redesign them if necessary. Questions he can ask himself: which parts are critical, who needs which powers and how do I as an entrepreneur stay "in control" in the most efficient way.
Coincidental or not?
Coincidence plays a big role everywhere. The degree of impact that chance has, however, is within your control as an entrepreneur. Good preparation in internationalization is very important. Not only does it prevent bleeders and put the continuity of the company at risk. The success rate of further international rollout also increases. After all, with thorough preparation and a financially sound basis, you are more decisive and flexible. Let those be typical entrepreneurial skills.