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NOV 12

Know Your Market

I was recently interviewed by Chris Bell (wordsSHIFTminds) as part of a supplement he was producing for the upcoming CFO Summit.

A number of topics were discussed, ranging from how CFO’s can add to the competitive advantage of their companies and how technology has improved the export capability of New Zealand firms.

We first talked about the current climate for export businesses.  New Zealand has a skewed policy focus towards agriculture, or more generally high asset low revenue characteristics.  This means that such businesses have little problem convincing banks to provide growth finance, nice “safe” lending as assets provide an equity buffer (most of the time anyway).  This is an issue for many of the up and coming businesses in the manufacturing and export sector.  For example, a software company will have very low assets, but generate high revenue and highly paid jobs.  Banks are reluctant to lend on the basis of cash flow, causing capital flows into “safe” sectors that are much less profitable, slowing growth.

Our discussion inevitably turned to exchange rates.  Chris asked how New Zealand business can deal with the rising and volatile exchange rate.  With the current hands off policy in regard to exchange rates it is foolish to rely on favorable exchange rates; you must consider what might happen and ensure your business can survive in the possible extremes – 40% adverse for 18 months and 20% adverse forever would be a good initial planning scenario.

Hedging can help in the short term and smooth some variations but it cannot work forever, it has a cost and it will not remove all the risk.  The real functional currency of your business is an important factor to consider.  If you are a high tech company based in New Zealand, selling most of your product in US dollars, moving your operations and consequently most costs to the US could be considered as the “ultimate hedge” against currency movements.  A business can also create a natural hedge by trading in a number of markets and currencies.

The question arose, “What is the CFO’s part in all of this?”

A CFO needs to inform the CEO of any viable options, and help defend margins within the business.  This must consider how the macroeconomic frameworks in different markets and the impact of cross currency transactions might impact the consolidated position.  The CFO has a significant role in these discussions.

Our next point of discussion was how exactly can one identify an export market in which they can sell a product successfully? The theme for this answer was most definitely, know your market.  You need to find market space that your product can fill at a price that makes sense to you and your channel partners.  Distribution is key, profitable channel partners are a requirement, your products have to make sense to them and the end customer. Communication technology cannot replace face to face interaction with channel partners.  To really judge if you align with the potential channel partner, you need to know them and be there on a regular basis.

Success in an export market is as much an investment of time as anything else.  Expect and be willing to spend a lot of time familiarising yourself with the potential market.  You need to know your competition, their prices and their explicit strategies as least as well as your channel partner so you can have a robust informed conversation with the channel, and not rely on what you are told.

tags: market, chris bell, cfo, hedging
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