06 November 2014, Global Connections

Manage working capital in each stage of your business lifecycle

Consider cash cycles, currency risks, and global liquidity when growing your business

Asked what advice he has for clients who want to expand their business internationally, Rory Langran kept it short:
“Make sure you realize that the countries you’re going to are going be different from what you’re used to in Canada.”

Mr. Langran, is HSBC Bank Canada’s head of sales, global payments and cash management, for the British Columbia and Western region.

“Ask a lot of questions about what you can expect to see overseas, and be prepared.”

Grow with global opportunities

Against the backdrop of a federal government push to sign free-trade agreements with South Korea and the European Union, Canadian businesses are increasingly capitalizing on growth opportunities abroad. Canadian exports hit $472 billion last year, according to Industry Canada, a 31% increase since 2008.

It’s not just about the accounts; you have to be aware of what’s going on in those accounts

Mr. Langran, is HSBC Bank Canada’s head of sales, global payments and cash management, for the British Columbia and Western region.

For many companies, though, putting capital to work in this unfamiliar global landscape can be challenging. “We see opportunities for growth worldwide and can help you take advantage of those opportunities,” said Joshua Kroeker, assistant vice-president, business development, global trade and receivable finance.

As he pointed out, the U.S. remains Canada’s No. 1 trading partner. But Asia, the other big player, is gaining fast. Since 2004 Canada’s compound annual growth rate of import and export volume with the U.S was just 2.2 per cent. On the other hand, trade with Asia comprised a 22.2 per cent compound annual growth rate during the same period.

Raincoast Manufacturing: A Fictional Case Study

To illustrate challenges going abroad and the importance of managing working capital, consider a fictional case study: Raincoast Manufacturing Ltd., a B.C. company in the alternative energy space that designs, makes and distributes wind turbines and solar panels.

Development: Establish solid footing

In its early years, the company grows to about 20 employees and a senior management team of four. With annual sales of $7 million, mostly in the domestic market, it buys all of its raw materials from local vendors.

During its formative years, Raincoast has fairly basic needs, although it still should examine how it can optimize working capital. For example: a delay in collecting receivables means the company can find themselves unnecessarily cash constrained; account reconciliation is cumbersome; Raincoast must manage the risk of cheque fraud.

From a working capital standpoint, there are several opportunities:

  • Visibility into your accounts can help you manage liquidity and ease reporting burdens.
  • Efficient disbursements can help you make payments securely and on-time, whether by cheque, wire or electronic funds transfers (EFT).
  • Collecting receivables in a timely manner can directly impact financial operations.
  • International capabilities, for future growth, that assists in moving money around overseas.

“It’s not just about the accounts; you have to be aware of what’s going on in those accounts,” advised Mr. Langran. “So it’s about control and visibility.”

A good payment and cash management system can help clear these hurdles.

Growth: Mitigate your risk with trade financing

Raincoast grows with increasing overseas sales, and the need for a global supply chain. This growth phase comes with a whole new set of challenges.

“They’re going to need to manage a lot of that risk in having that overseas supply chain and those overseas sales, and the working capital needs that come with it,” said Mr. Kroeker.

Manage cash cycles

Doing business abroad means an extended cash conversion cycle – longer lead times with suppliers and longer payment terms with customers.

Traditional financing solutions, like a line of credit, generally look at past performance, but as Raincoast grows exponentially, a forward looking financing solution is important.

“Take a forward-looking approach: ask what your company is doing over the next 12 months, how it plans to meet its working capital needs and mitigate the associated risk,” suggests Mr. Kroeker.

“If it takes cash from you, that’s the part where your bank can help. We’re going to look at transaction based financing, what are the individual needs of your company that are rapidly changing, and how can we meet them.”

Maintain global visibility

Companies that are used to the relatively simple Canadian banking system will find it more difficult to move money around overseas.

Mr. Langran advises to use one platform: “Raincoast should actually put all their accounts on one platform regardless of the country to get a complete picture of all those accounts rather than to have to log on to multiple different banking platforms.”

HSBC’s payment and cash management system incorporates cash management, treasury and trade on a single platform for all accounts. “Not only do you get the Canadian functionality; you get all the international accounts all in one spot,” Mr. Langran said.

Manage currency risk

Although Raincoast sources from and has vendors in China, they pay in US dollars. “Often what vendors are doing is marking invoices up,” explains Mr. Langran.

Here are solutions Raincoast can explore to reduce their foreign currency exposure during the growth phase:

  1. Request invoices in both currencies: By requesting invoices from Chinese vendors in both U.S. dollars and renminbi and doing the conversion themselves, Canadian businesses can save money. “Generally what we’ve found from our clients who are asking for dual invoices is that the savings are about 2 to 3 per cent when settling in renminbi,” Mr. Langran said.
  2. Use multiple currency accounts: HSBC is one of the few banks in Canada that offer accounts in multiple currencies such as the yen and the euro. The newest addition is the Chinese renminbi.

Implementation: Hedge risks when building globally

Finally, Raincoast decides to open two foreign subsidiaries, in the U.S. and China. Annual sales have climbed to between $35 million and $50 million. As it builds the subsidiaries, it wins and pursues more foreign contracts.

“At this stage of growth we would look to introduce some form of FX hedging: it allows Raincoast to know what they’re going to sell those US dollars for at the end when they get paid by their customers,” explains John Muth, HSBC Bank Canada’s vice president of corporate treasury solutions.

If the company is paying for raw materials from China with U.S. dollars, instead of depending on the market fluctuations of the USD, Raincoast can hedge using a forex swap. This means it can purchase the dollars it needs, and enter into an agreement which buys them back at the end of the production cycle.

In addition, Raincoast might look at introducing forex options into their hedging mix. Options provide the ability to participate in favourable exchange rate moves, he added, comparing them to insurance. “You can protect yourself from the worst case and allow yourself to benefit should the exchange rate move in your favour.”

Offer local solutions

Localized guarantees can help mitigate working capital risks when operating globally.

“When companies like Raincoast expand their supply chain and physical network overseas, buyers often require a bank guarantee on the product. But not every buyer will want a guarantee from a Canadian bank. HSBC solves that problem by issuing guarantees via its local offices worldwide,” Mr. Kroeker said.

Managing a global business is easier with a global bank

For businesses with foreign operations, HSBC Bank Canada offers advantages that no domestic rival can match.

Through its international relationship managers, holistic cross-border banking solutions, and a $2 billion fund to help companies expand abroad, clients can tap into HSBC Group’s 6,300 offices in nearly 60 countries.

“HSBC wants to leverage its network to help you grow your business,” stated Mr. Kroeker.

Disclaimer

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

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