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Top Pitfalls of Starting A Business Overseas
A continuing series exploring the fundamental pitfalls entrepreneurs face when relocating overseas
By GEMMA ALDRIDGE
Poor finance is the most common reason a business fails. From inadequate planning to misguided cash-flow management, finances can suffer at many points in a company's life-cycle. And the worst thing is, it's usually preventable.
Proper planning and meticulous money-management are essential to a business's buoyancy, from start-up to expansion. A thorough business plan should eliminate any unwanted surprises when starting up a new venture – indeed, the emphasis on a solid business plan can never be overstated.
Some of the common oversights and pitfalls are:
Underestimated start-up costs, such as incorporation, licensing, stock and labour
Under-planning and overspending
Poor capital structure, including vast amounts of accumulated debt
Lack of reserve funds
As aforesaid, never can the importance of a business plan be overstated. With out a structure, aims, goals, and general critique of your intentions, it is very hard to be objective, especially at a time when the stakes – and your emotions – are high.
The plan will ultimately deduce whether your business is financially viable, and if so, forecast for the future. The plan should be as meticulous as possible, detailing such things as:
Executive summary: a general overview of the business you intend to start. It is essential. It could influence everything from securing investment to the success of your venture.
Sales & market plan: how you intend to represent / package your product or service and bring it to a consumer could be the difference between make or break.
Operations: your location, production facilities, distributors, information systems, etc, should all be planned as far forward as possible.
Financial forecast: transforming your business plan from words to numbers. At this stage, you could even be forced to revise your strategy.
Another essential part of planning is cultural familiarisation. Understanding national protocol and etiquette could mean the difference between sinking or success. Some of the things to consider are: meetings, dining, greeting and relationships.
In certain countries, you will also have to consider such things as the choice of colour and numbers in your marketing and advertising: in China for instance, using the wrong strategy could detract customers.
Lost in translation
When starting up abroad, it is important to consider how you will translate to the locals. The obvious stumbling block is language. If you are moving to a non-English speaking country, it is essential to learn at least some of the local language before relocating, and preferably before you begin to establish your business links.
Many Brits who relocate and start enterprises abroad fall into the trap of misunderstanding what exactly is required of them, or what they can expect from other parties, when making business deals, or trading with locals. Although many foreign businesses employ English speakers to deal with overseas trade, it pays to put yourself on an equal footing by familiarising yourself with business terminology and basics of the local language.
One of the first things you need to decide, even before you can start working on a business plan, is where you will locate your business. From that, you can then start accounting for your market, distribution companies, overheads, etc.
These are some of the essentialities to consider:
Labour Costs – can you offer competitive rates for your industry?
Site and capital costs – land and rent costs?
Transport – will you offer a deliver service? Will you deal with perishable goods? If so, think of the proximity from your market base
Proximity from suppliers – will you find a local, reliable supplier, or have to seek one further afield?
Language factors – will you need translators and interpretors for meetings, PR, etc?
What’s at stake?
One of the major pitfalls of setting up any business is that while there is money to be made, the stakes are high, and many people lose their investments. It is well known that to start up a business abroad can be a very expensive process, requiring up-front payments for relocation, licensing, visas, legal and/or translation fees etc. It seems an obvious point to make, but in the current economic climate, it is essential to consider not only whether you can gather the funds, but also where your capital is coming from.
Unfortunately there are potential problems whether you invest your own savings or you borrow money from a bank: If you take your own money out of savings and push it into your new business, you stand to lose not only the capital, but the potential interest you would be earning on it elsewhere. If you chose to borrow the money, however, you may find that it is currently difficult to find a loan with a good interest rate, meaning you may end up paying back much more than you borrow. Make sure you go through your options with a financial professional and look ahead at the potential outcomes.
A sudden change in exchange rates can cost you a great deal when you move your assets overseas. The current state of the global economy means that exchange rates are expected to be in flux for some time to come, so be careful when moving your money or investing it abroad.
Some foreign-exchange traders let you fix the exchange rate at which your money is transferred overseas up to two years ahead, but even this isn’t a failsafe method. You know exactly how much you will get, even if rates change, but you miss out on positive changes in the exchange rates.
There are many myths about moving, investing and starting a business abroad, which mean that people often see it as a quick way to make some money. Many people think that by moving abroad they can avoid the pressures of the UK tax man, but in practice this is not always the case.
Although you can apply to become resident for tax purposes if you stay in a country for more than six months a year, tax is still payable on all UK-earned income or gains from bank accounts and property. In addition, while the country you relocate to may give you a discount for taxes you have already paid in the UK, if the UK taxes are lower, you may still have to make up the difference yourself.
Always check exactly what you will be expected to pay, and what you will save or lose before launching a business plan.
Foreign Credit Control
It's by-product of business: credit control. Companies cannot remain immune from late payments and outstanding debts from clients. In the worse case scenario, it could lead to insolvency. But chasing and managing debts is a day-to-day task for most businesses.
Dealing with overseas clients can prove even harder though. There are, however, many steps you can take to reduce the number of late payments:
Specify all terms and conditions of payment unequivocally and ensure they are agreed upon and signed by the client. Set a standard 'pay by' period, something like 30 days, depending on your type of business.
Maybe offer an early payment discount. This will entice clients to pay early and ensure you don't make a bigger loss in the long-run.
Always make a point of contact with the accounts department – it will have time and hassle. Use this relationship to follow-up on invoices and discuss payment. In the worst case, you may be forced to charge interest or threaten litigation.
Familiarise yourself with the business legislation concerning late payments. For instance, in the UK, we have the Late Payment of Commercial Debts Act, which strives to account for and retrieve outstanding debt for small businesses.