The SME CFO’s checklist for international expansion

Most modern small and medium-sized enterprises (SMEs) are international operators by default. Whether you're sourcing products from Asia and selling them in the European Union (EU) or manufacturing in the EU and shipping goods to North America, managing international expansion is part and parcel of an SME CFO's job.

The question is: How do you manage international expansion risks successfully? Here are three critical questions you must answer to solve this challenge:

• How will you handle payments?
• How will you make money?
• How will you remain compliant?

Let's dive into them separately, starting with payments.

Question 1: How will you handle payments?

Ensuring smooth cash flow is one of your primary tasks as CFO. The good news is you can categorise payment-related challenges into three buckets and deal with them accordingly.

Here are the main challenges concerning payments:

• Paying employees
• Paying suppliers
• Designing compensation structures

Let's look at them one by one.

Paying employees

Despite the rise in remote work and the technology that enables it, you might find hiring employees locally the most logical choice. While local employees aid business operations, they could pose payment-related challenges.

Specifically:

• You must pay them on time without fail
• You must pay them the right amounts in local currencies
• You must minimise exchange and transfer fees

Aleksandar Stojanovic, Founder at Fiscallion, has previous experience with such matters. "It's crucial to integrate robust payroll systems tailored to local regulations and currency," he says.

"I would partner with local banks and payment processors to streamline transactions. Using cloud-based payroll software that supports multi-currency and adheres to local tax laws is essential."

Partnering with local banks might be cumbersome for some businesses. In such cases, cross-border payment providers can provide a more convenient and efficient option.

For instance, iBanFirst clients can instantly open multi-currency accounts online, bypassing slow approval processes and excessive paperwork associated with setting up traditional bank accounts.

Stojanovic also recommends maintaining a buffer in operational budgets to accommodate currency fluctuation. "This ensures uninterrupted payroll processing," he says.

Paying suppliers

Paying your suppliers on time and in the right amounts is critical to maintaining a good relationship. The problem is traditional banking routes act as a roadblock.

"We always need payment confirmation before the supplier releases the merchandise. And with our bank partners, there was always a one-week delay." says Jean-Nicolas Payart, Founder at Hircus. "This was very limiting, especially as I was unable to track payments as they passed through different intermediary banks. It made it impossible for us to be transparent with our suppliers on this issue", he adds.

While using an experienced payment provider like iBanFirst made Jean-Nicolas' life easier, your first step should be to understand local payment customs.

Ask questions like:

• What kind of confirmation will your suppliers need before releasing merchandise?
• What are delivery lead times?
• What payment channels can they accept?
• Can you accommodate those channels?

Another aspect to address is your currency risk management approach. This way, you can guarantee suppliers exact payments in local currencies and prevent losses from currency fluctuations on your books. Keep your FX risk management strategy simple, with a mix of forwards and spot contracts. Revisit and review it for the next six months.

Again, work with a trusted currency risk management specialist to figure out your exposure and how to mitigate it. Examine their experience and the spreads they offer while keeping cost-effectiveness in mind.

Designing compensation structures

Payroll is your biggest expense, and an international location complicates compensation costs. One of the first questions you'll have to answer is: Should you establish locally, through an Employer of Record (EOR) or hire contractors?

Remember to account for local compensation nuances. For instance, CJ Gustafson notes that Nordic salaries are lower than the rest of the world. However, government-mandated benefits can increase compensation costs by 20% in Norway and 40% in Sweden.

This means modelling labour costs accurately is critical. Stojanovic lists Mercer's Cost of Living Reports and Payscale as valuable benchmark resources.

But how should CFOs mitigate the risk of cost fluctuations?

"I use a two-pronged strategy," he says. "First, implement a flexible wage structure with components tied to performance and company success, such as bonuses or stock options."

"Second, set up contingency funds that account for a 10-15% increase in labour costs." This ensures financial flexibility. Periodically review these costs, and you'll make sure they're always valid.

Question 2: How will you make money?

This question may seem odd since you have an established product and have noted demand indicators in your new market. However, earning cross-border revenues can be complicated.

For instance, do you know what your cash flow pattern will look like after expansion? Here are the three factors you must examine to mitigate revenue-related risks:

• Seasonal trends
• Ease of doing business
• Local culture

Let's look at these separately.

Seasonal trends

Unique seasonal trends can jeopardise your cash flow if you're not careful. For instance, if you're selling goods in Canada, that country experiences a different Thanksgiving sales boost than the USA.

Trends like these can create a situation where you experience a high volume of cross-border payments in a tight period, creating a significant degree of risk. A good currency risk management strategy, planned in anticipation of these periods, can help you reduce your exposure.

Stojanovic advocates the use of a strong risk management strategy. "Employing financial instruments like forward contracts to lock in exchange rates for future transactions [is critical]," he says.

"Additionally, diversifying currency holdings and regularly reviewing the currency portfolio against market trends helps in mitigating risks."

Seasonal trends can disrupt your plans quickly. Use predictive analytics and economic forecasting tools to help you anticipate and plan ahead of time. The help a dedicated manager at a third party currency management platform offers is invaluable in this regard.

Most importantly, they can also help you transfer cash from abroad to your home country, managing intercompany flows cost-effectively.

Ease of business

Does the local government hinder or help business operations? For instance, you might want to expand into Brazil, but operations there come with an implicit cost (referred to as "Custo Brasil.")

In addition, the government charges import taxes on local currency payouts, increasing costs for your suppliers. Worse, these taxes occur at local and federal levels, sometimes doubling the cost of goods.

Here are a few steps you can take to figure out the local government's true attitude to business:

• Examine local payment networks and processes
• Speak to experienced service providers with local experience
• Review local tax complexity—complex taxes usually imply complex payments
• Review unionisation support and tolerance for work stoppages

Local culture

Many foreign companies have inadvertently turned local populations away from their products. Even a company the size of BMW fell foul of this in the United Arab Emirates.

Examine whether locals intend to buy the goods you sell from foreign companies. Often, "buy local" movements spring up seemingly overnight, and these can jeopardise your revenues.

To tackle this, CFOs should team up with marketing and sales to align sales forecasts, pricing models and supply chain strategies with local market trends.

Question 3: How will you remain compliant?

Local governments do not take kindly to foreign companies skirting regulations. Here are the three processes you must control to ensure you stay on the right side of the law:

• Regulatory filings
• IT infrastructure
• Back office resources

Let's look at each of them in detail.

Regulatory filings

This is a big one: How will you pay taxes, and how complicated is your reporting?

The EU is one of the most complex jurisdictions from a tax perspective and comes with a host of regulations surrounding consumer data privacy.

Simply put, if you're expanding here, you must figure out what data you need and how to get this to the government.

The United Kingdom (UK) is no different. Companies must electronically file their Pay-as-you-earn (PAYE) records every month or incur penalties.

Staying on top of tax regulations is critical. Work with a local tax expert to simplify this process and ensure you're on the right side of the law.

IT infrastructure

The quality of your IT infrastructure determines how well you'll remain compliant. Stojanovic recommends auditing your existing systems to figure out where gaps exist.

"Evaluate factors like data sovereignty compliance, ensuring the infrastructure aligns with local data protection laws like GDPR in Europe," he says. "Reassess cybersecurity measures to counteract any region-specific cyber threats."

These tasks might seem more suited to your Head of Technology, and they are. However, the modern CFO is a strategic partner, and you must collaborate with them to understand the costs involved in these processes.

Stojanovic offers an example. "Can your cloud services seamlessly integrate with local ISPs?" he says. "Do you need additional VPNs for secure communication?"

These costs add up quickly. Understanding them beforehand will save you time and money.

Back office resources

Modelling resource needs is critical when expanding internationally. Will you hire contractors or employees? What are their costs and regulatory impact?

Collaborate with your company's department heads to model their needs and calculate costs. Even after doing all this, Stojanovic cautions, you might find actuals exceed budgeted amounts.

"Conduct a thorough variance analysis to identify the root causes, be it unpredictable operational costs, currency fluctuations, or higher than expected labour costs," he advises.

He also lists renegotiating supplier contracts or temporarily scaling back non-essential expenditures as tactics to bring actuals in line with your projections.

Go international with iBanFirst

International expansion can be tricky, especially when cross-border payments come into play.

At iBanFirst, we're dedicated to helping SMBs grow beyond borders. Seamlessly collect, convert, and send funds across 140+ countries. Benefit from fast, transparent, and low-fee international transfers while safeguarding your business from currency market fluctuations.

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