Minimise risk with management plans
Like any business transaction, export involves risk. There are a number of techniques to protect your company from the risks associated with export. Developing a simple risk management plan is a good starting point.
What are the risks from export?
International transactions can involve different risks from those encountered domestically. These include foreign exchange risk exposure, political risk (which may result in the buyer’s inability to remit foreign currency), shipping risks (loss, damage or delay), customs clearance delays, quarantine, local legal issues and standards regulations. These risks can generally be readily identified and assessed.
Many export risks will be country-specific. For example, exporting to New Zealand, Singapore or Hong Kong on letter of credit or secured terms has low risk if you perform and your buyer is reputable. While open account (no payment guarantee) deals in the USA can be high risk and you have limited recourse to recover debts.
The following are highlighted risks, which are not experienced on the domestic market:
- Political risk: Some countries may experience major political instability, which could result in defaults on payments, exchange transfer blockages, nationalisation or confiscation of property. Civil disorder may affect personal security. The Department of Foreign Affairs and Trade, Austrade and the Export Finance and Insurance Corporation (EFIC) continually monitor the effects of political changes on Australian businesses and can be contacted to discuss any concerns. EFIC provides Political Risk Insurance to help mitigate these risks.
- Legal risk: Differences in law (from the Australian model) can be expected in overseas countries. These may have an impact in such areas as import procedures, taxation, employment practices, currency dealings, property rights, the protection of intellectual property and agency/distributorship arrangements. Obtaining advice from respected legal practitioners in the countries concerned is imperative. Austrade’s overseas offices will normally be able to recommend a number of lawyers from whom you can choose a representative.
- Graft and corruption: Graft and corruption are illegal in virtually all countries, however, may exist to varying degrees in some countries. Under Australian law it is an offence to offer illegal payments and action can be taken against you on your return to Australia. The relevant law is the Federal Government’s ‘Criminal Code Amendment (Bribery of Foreign Public Officials) Act 1999’.
- Credit/financing risks: To protect yourself against payment default it is prudent, at least initially, to use payment methods which provide you with some security, eg. irrevocable letters of credit. Your bank will be able to provide advice on payment options and their relative advantages. Banks also advise how you can protect yourself against changes in currency relativities as international trading exposes you to foreign exchange risks. EFIC can provide competitive finance and insurance facilities to assist Australian companies exporting and investing overseas.
- Quarantine compliance: Just as Australia does, overseas countries have strict quarantine requirements and the need to ensure they are enforced. To make sure you are aware the overseas buyer's quarantine requirements, check with the Australian Quarantine Information Service (AQIS) for details of what is and what isn't allowed.
How do I cope with these risks?
Develop a simple risk management plan that recognises your exposure and addresses each element of your transaction where you are exposed to risks, and talk to experienced advisers. Credit insurance and managing exchange rate risk are covered in ‘Getting Financial Assistance’.
The OECD has released a Risk Awareness Tool for Multinational Enterprises in Weak Governance Zones. The tool aims to help companies address risks and ethical dilemmas that companies are likely to face in weak governance zones, including obeying the law and observing international instruments, heightened care in managing investments, knowing business partners and clients and dealing with public sector officials, and speaking out about wrongdoing.
What is a risk management plan?
A good definition of risk and risk management is: ‘Risk is anything that threatens or limits the ability of a project to achieve its goal, objectives, or the production of project deliverables. Risk management is a process of thinking systematically about all possible undesirable outcomes before they happen and setting up procedures that will avoid them, minimise or cope with their impact.’ There are six basic elements of the risk management process:
- Establishing the context
- Identifying the risks
- Assessing probability and possible consequences of risks
- Developing strategies to mitigate these risks
- Monitoring and reviewing the outcomes
- Communicating and consulting with the parties involved
Create a risk management matrix
Start your risk management plan by creating a simple matrix of potential risks. This is a good way of identifying the probability of risks occurring and the consequences if they did occur.
Creating the matrix will help you to order the priority of issues that cannot be ignored. Grading risks helps you to focus on the critical areas and to mitigate them before they become a crisis. For example, if all your export business is with a single client in Malaysia, and that company becomes insolvent, the outcome could be catastrophic. But if the likelihood of insolvency is low, your risk ranking for that event is more moderate, although still requiring to be monitored.
A risk management plan will also help you develop and broaden your risk profile for the Australian market. For a small business, keep your risk management analysis clear and simple, but ensure it has priority for everyone in the company.
Review
Review your risk profile regularly to ensure you cover any emerging market changes.
For more information, please call 13 28 78 or email info@austrade.gov.au.
An Export Adviser can help you build and consolidate your export know-how.
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