Strategic Risk Management Means Preparing for the Worst but Hoping for the Best
Trading globally comes with risks. You’re operating in a foreign market with different rules, regulations and business practices, not to mention the lack of geographic proximity makes it difficult to keep tabs on your trading partner and ensure the relationship is strong and payments will be made promptly. That said, those risks can be minimized with a smart risk management strategy that tips the risk/reward balance in your company’s favor.
A smart risk management strategy begins with a solid foundation in research that takes a macro look at the market and a micro look at your trading partner and their sector. For the former, the World Bank’s ease of doing business index can provide valuable information on business regulations in nearly 200 economies. Trade credit insurers can also help you keep tabs on specific markets and sectors.
To better understand your trading partner, start by researching the cultural elements of doing business in that market. Making a mistake can negatively affect or even end your relationship with your trading partner. Ask colleagues about any business culture etiquette you should be aware of, and review your notes before making the initial introduction. Getting this part correct will help you forge a strong relationship moving forward.
Next, take your time before signing any contracts. It may be tempting to quickly jump into a new opportunity, but if you rush through the documentation process, neglect to have a lawyer review the terms of your agreement or fail to validate your trading partner’s sound financial standing, you could end up with major headaches in the future.
Once you have an agreement in place, figure out how to maintain a close relationship with your trading partner. You don’t want to find out too late that your trading partner is in distress – you want to be aware of the first signs of trouble so you can take steps to protect yourself against late payment or nonpayment. Some of the classic signs of a company headed for insolvency include sudden late payments, pushing back for discounts or a drop-off in communication.
If your customer is overseas, don’t assume email and phone calls will be enough. A local presence is advised, as this is the only real way to understand the subtle shifts occurring in the local market and with your trading partner. How you establish the local presence will depend on the size of your opportunity. Large business deals may require establishing a foreign office, while appointing a local agent or having an employee visit frequently may suffice for smaller opportunities.
Finally, have contingency plans in place to cover any and all likely scenarios, including disruptions to trade via major events (such as the coronavirus shutting down production facilities in China or the trade wars suddenly making input materials more expensive) or delinquent customers. For the former scenario, you’ll want to understand how political or economic developments will impact your costs and know how you’ll pivot, if needed.
For delinquent customers, your first step should be establishing the facts and uncovering what’s actually going on. If the customer proves slippery and evasive, consider engaging a third-party expert to mediate. Review your contract terms to make a list of options available to you – can you recover your goods? Or is it time to start the legal collection process?
Strategic risk management is really about preparing for the worst but hoping for the best. A thorough understanding of the market, the sector and your trading partners, paired with detailed plans for how to react to any likely scenarios will minimize the risks to your business and help you feel confident conquering new markets.
Gordon Cessford is the president and regional director of North America for Atradius Trade Credit Insurance, Inc.
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