Businesses expand across borders for a variety of reasons, building strength and diversifying while allowing them to expand beyond what their national market will allow. Operating across borders carries a risk, however, and it is not uncommon for businesses to enter overseas markets only to make a quick and hasty retreat. Being aware of the potential issues will help you to avoid making mistakes that will lead to losses.
Why look for business in other markets?
The number one reason for companies to take their products and services overseas is the quest for more revenue. Even though the US is a very large country, it only presents a small proportion of the global population. By taking your business to other markets, you can sell to more people and boost your revenue.
Staying in a single nation brings risks – if the country that you’re in experiences a downturn, or if there is a new competitor, you can lose business. If your revenue is sourced from different countries, this risk is mitigated as your other revenue sources can make up for decreased sales in a specific market. It also helps to get input and experience from workers in different cultures as this will improve what you have to offer the market.
Potential financial problems with an international branch
In both the short term and the long term, your business needs to be aware of changes in foreign exchange rates as it will affect the prices of inputs – and the amount of profit. Some countries apply currency controls, which can limit the profit that you can move out of the country. At the same time, financial institutions such as banks can be weaker in some countries, so your money may not be safe.
Political risks can also have a financial impact on your business, with sudden changes in governance or the outbreak of wars being top concerns for financial managers in some regions. It is not unheard of for governments to seize private assets without compensation, for example. Though some of these riskier markets can offer very large profits, they do come with added uncertainty, and your business needs to evaluate whether the profits are worth the risk with which you are engaging.
How to deal with financial risks in overseas business
Millions of businesses work across borders, and the tools to hedge against foreign financial and operational risks are well developed. It can be worth hiring an advisor such as Forth Capital to assist your business in the planning phases of going international. Many advisories have extensive ground knowledge of the specific countries in which you choose to operate and provide the necessary help an new business needs.
Reducing financial issues while operating overseas involves a strategy with a number of elements. You need to build an understanding of the market risks, purchase forex hedges to protect you against currency swings, and if possible take out insurance protecting you against political risk. The most important factor, however, is to be aware in the first instance that your new trading environment poses issues and dangers unlike those of your own market – and to identify and individually mitigate these issues.