MANAGING THE FINANCIAL ASPECTS OF OVERSEAS EXPANSION

Globalisation and the integration of markets has made overseas expansion easier and simpler. Increasingly industries are expanding globally, which is providing opportunities for growth companies as they try and maintain the pace with their clients, following them to new markets and regions.

Publishing Technology, aleading software supplier to the publishing industry, established a presence in China, India, Australia and Brazil over an 18-month period in response to the globalisation of the publishing industry. CFO, Alan Moug, advises how growth businesses should manage the financialaspects of overseas expansion.

Seek profit not prestige

The starting point is to ensure that your expansion strategy is dictated by clear commercial rationale;profits not prestige. Once you have convinced yourself that there is a genuine opportunity in the market you have targeted, then you need to focus not on only the operational opportunities but also on the market’s regulatory and legal framework, the fiscal and tax regime and the political backdrop. The tax regime, for instance, may not allow you to re-patriate sufficient profits, the legal system may not guarantee security of contract. Many businesses, dazzled by the apparent scale of an opportunity in a new market, have seen such factors ruin their prospects.

Review your funding and forex options

Think carefully about how you will fund overseas expansion – it should not damage your core business.The ideal situation is to have cash on your balance sheet,but if you need to raise funds then debt rather than equity would be the less expensive and preferred route. Managing foreign exchange is one of the biggest financial risks to consider when expanding abroad, particularly into less stable emerging markets. It’s probably best to ensure that as much of your costsare maintainedin the local currency to match growing revenues and avoid having to use complicated and expensive hedging instruments.

Choose a suitable expansion route

The extent of the opportunity and familiarity of local markets typically dictatesa company’s expansion route. China,voted the thirdmost desirable market for business expansion in a recent BT report,The Art of Connecting Global Business,will be a long-term target for many growth businesses.

However, it’s not an easy market to master, with a variety of cultural and business differences to comprehend. Given this, forming a joint venture with a local partner as Publishing Technology has donewill help you deal with these issues and may also allow you to share resources – IT, HR and administrative support etc.- to minimise your operational costs.

Greater familiarity with thecultural environment in a particular region usually suggests that opening a local office is the right path to take. It’s also helpful if you have gained familiarity with a market thanks to an existing client. For instance, we represent science publisher BioOneglobally, including in Brazil, which meant we had an opportunity to properly assess the market before committing more resources to the country.

Locate trusted sources for your information

Having the right local information is key.According to a recent survey by BDO, CFOs view accountants and tax specialists as their most trusted counsel when it comes to establishing an international presence. But it’s important to have a balance between, say, international calibre advisers who can give more general advice and local advisers on the ground who have a far more detailed and informed knowledge of the local commercial environment, and the practical pitfalls to watch out for in doing business.

Be cautious in your cost forecasts

Don’t under-estimatethe cost ofestablishing an overseas presence – they are almost always greater than you think. Some costs, such as those related to rent, insurance etc you can accurately estimate, but others are more unpredictable, such as the cost of unexpected staff turnover, unforeseen salary increases, ifinflation soars as it can do in emerging markets.

Also, ensure your cost base is easily scalable. By signing short term leases with serviced offices where possible and negotiating flexible employment contracts, you can scale your business to match market conditions as cheaply and easily as possible.

Design the optimal sales strategy

Don’t miss out on new business opportunities because of an ill-thought through sales strategy. You should be clear which saleslocal branches can undertake and which should remain the remit of your head office sales team. Sales for pub2web, our custom hosting solution designed tostructure and distribute publishers’ information online,are largely done through our local offices; however, sales of advance, our unique ERP software package, which is larger in scale,are managed from our head office.

While it is often a failure to deal with the financial aspects of overseas expansion that undermine a company’s international growth strategy, when properly managed they can be mastered and allow growth companies to flourish in new markets.