12 Opportunities and 7 Challenges When Going Global
Accounting across borders can be challenging, but also full of opportunities. It’s especially true now with the increased globalization of commerce and the shifting financial landscape.
In this post we present twelve opportunities – and sevenchallenges too – for businesses of all sizes in today’s era of globalization. These range from growth to new business models to managing cash; there is something here for every organization, no matter where it operates or what the scale of its activities are.
More than ever, whether you are a global player or local business, boom or bust, in good times and bad you need to know how to manage the flows of money through your business. You can then focus on the real value-added things you do that make a difference – marketing, selling and making profits – and leave deciding how to account for your cash, assets and liabilities for someone else.
Top 12 Opportunities
#1 – Access to New Customers
For many companies, the ease of operating internationally is a prime opportunity. In this globalized economy, companies and individuals can find new customers almost anywhere in the world. As a result, many global companies are expanding into new markets, gaining access to markets they were previously unable to tap into.
For example, Canadian companies don’t have the same cost of entry into other countries as they used to in the past. Telecommuting and falling costs of technology mean that communication and collaboration with international partners can be conducted with much lower overhead costs. In fact, many companies are now choosing to expand outside their home country so they can reach new customers. In fact, many small and medium-sized Canadian companies are using social media and online marketplaces like Shopify to broaden their reach.
#2 – Cash Flow Opportunities
Global businesses have more options when it comes to how they manage their cash flow. This is especially true if they’re going global or taking greater advantage of foreign currency opportunities to having operations around the globe. There are also more opportunities to get paid in different currencies, which can help reduce interest expenses and boost cash flow from international business activities.
#3 – Profit Opportunities
Another opportunity for businesses of all sizes is to take advantage of the opportunities presented by global markets. Notably, a small company may have more global purchasing power than larger competitors. A smaller retailer might benefit from less stringent credit screening requirements in some countries than those imposed by larger companies. Or, perhaps a private label (PL) Amazon seller has access to niche products that larger retailers don’t. These are just a few examples of how businesses can leverage their small size and agility to provide new offerings in new markets.
#4 – Tax Opportunities
A global business will need to take advantage of the diverse set of tax rules in other countries to maximize profits and minimize tax liabilities. While this will require a commitment to learning about the tax laws and regulations in other countries, and being prepared to implement them, it can pay off over time. Most countries also have tax treaties with other countries that minimize double taxation.
Understanding your business and the transaction flows allows you to make tax-efficient choices to reduce your overall tax burden. A global business will need to take advantage of the diverse set of tax rules in other countries to optimize tax efficiency and mitigate tax liabilities.
Some important elements to consider is the use and mobilization of intellectual property (IP) and understanding how best to protect it while minimizing your overall corporate tax burden.
#5 – Growth Opportunities
Globalization also presents the opportunity for rapid growth. Whether it’s a new product, geographic expansion or simply doing business with companies overseas, there are numerous growth opportunities presented by globalization. For example, a small company could find new customers in other countries by promoting its products there or by offering to sell products using different currencies.
#6 – Lowering Costs
Going international or working with a global partner can help lower costs. Globalization allows for sourcing products or services from low-cost providers around the world. It also allows for businesses to be more flexible in the types of suppliers they use. Some companies have gone global by picking up freelance work from other countries or outsourcing it to other countries. for example, while some businesses have saved money by using their facilities in other countries, others have found it can often be more cost effective to set up new manufacturing operations.
#7 – Diversification of Business Risk
With the increased globalization of business, risk is spread among more entities. Companies can benefit by taking advantage of diversification, which may help reduce the risk that any one entity or country will negatively impact the company’s earnings.
For example, if a company has equity investments in more than one country, it makes it much harder for the company to suffer significant losses in one market and still maintain viability in another.
#8 – New Business Models
Accounting across borders is a good way to gain insights into the business model of the company, because you get to know how businesses operate in different countries and what strategies they use. It’s also great because you develop new connections, learn a lot about foreign markets and experience all these things first hand. For example, in the past, some companies that were accustomed to selling products in their local markets, became more familiar with the world market. They saw new opportunities to sell their products abroad and export them to more distant regions.
#9 – Information to Make Better Decisions
Going global can help companies stay ahead of the competition by gaining information on competitors in other countries that they might not otherwise be able to access. Sales, for example, are likely higher in a country where the competition isn’t as strong. By recognizing when these trends appear, companies can be more proactive about obtaining information on competitors and using it to adapt their strategy accordingly.
#10 – Shareholder Value
Globalization creates opportunities for business growth and value creation for the shareholders. For example, a company may decide to open or enlarge its manufacturing operation overseas in order to gain access to new markets or because of the low costs of doing business there. If the company decides grow globally, they will need additional cash. This can be accomplished through the sale of stock and the use of equity financing.
#11 – Building Brand Awareness
Globalization has created new opportunities for companies to increase their brand awareness across borders. They can do this by franchising or outsourcing products to other countries where they may not have as strong of a presence as they do in their home country. Companies can also leverage their global presence by having a presence on social media across different countries, such as Twitter, Facebook, Instagram, and TikTok.
#12 – Data Opportunities
Globalization has also enabled more secure and efficient data management. Businesses located around the world can now share information among themselves much easier than they could before. This can help eliminate duplicate or redundant business processes, increase efficiency across the organization and reduce costs by reducing errors.
Global Businesses Face Challenges
In addition to opportunities there are 7 key challenges that will need to be addressed if business owners are going global or growing their business abroad. Some of these challenges, such as currency fluctuations and import/export rules, can be managed to some extent; others, such as managing cash flow and taxes, are more complicated.
Here are 7 challenges that come with assigning more value and importance to international business:
#1 – Laws and regulations.
When products cross borders, rules and regulations regarding intellectual property, taxation, licensing and other practices may differ. For example, the distribution of a pharmaceutical across different countries may require the company to develop new distribution methods.
Some local regulations may conflict with international regulations, which can result in additional compliance challenges when operating internationally. For instance, if you are operating as a retailer in one country and manufacturing goods under lock-and-key conditions for use in another, you should ensure that you understand your obligation to comply with national laws.
International operations can bring more government scrutiny, resulting in more regulatory compliance and reporting requirements at both levels of the company (domestic and foreign). This may require an increase in the number of people trained on the company’s specific international needs.
#2 – Problems with payments
Communication can be a challenge when making international payments. The speed and efficiency of payment processing is a critical element to ensuring that money flows as quickly and easily as possible from one country to another. Finding a partner that can provide payment options at competitive rates can help avoid losses due to cross-border payments.
For example: It is a challenge for a trader to make international payments when the exporter and importer bank are from different countries. It takes time (days or weeks) for the money to come into the bank, in part because of communication challenges. One way to ensure that payments can be made quickly is to use a partner bank for international payments that has arrangements with both parties’ banks and understands their payment rules and practices.
Another option is using a multi-currency account. What is a multi-currency account provider? It is a third-party financial institution that banks with both the exporter and importer and can move money across borders more quickly. For example, a foreign currency to CAD dollar account allows you to clear payments in one currency, such as CAD, and make transfers between currencies at an even better rate of exchange. In this way you are paying minimal FX fees for each currency movement, but you get the benefit of using the rest of your account balance in your local currency while the payments are in different currencies.
“A multi-currency account lets you pay and get paid in the foreign currencies that you do business in. For example, businesses can receive funds from international marketplaces, payment gateways and customer invoices like a local using the OFX Global Currency Account,” says Alice Fu, she adds that “businesses can also pay overseas suppliers or pay taxes from their local account balances and avoid unnecessary conversion fees.”
#3 – Greater focus on risk management.
At any given time, companies will need to factor in the possibility of changes in key markets, economic conditions or business competitors. This means they must take a more proactive approach to risk management and safety. Companies that have operations in multiple countries will have to consider how changing conditions could affect their employees, customers and relationships.
For example, if you need to outsource some of your supply chain responsibilities in a new market, it could cause problems if an issue with production or delivery causes a stock shortage in your domestic market. What happens then? If you are using partners and suppliers that are located outside the country where your primary operation is located, it can be more difficult to manage the details of these relationships.
#4 – Managing cash flow (including payments and collections)
It may not be as simple as it sounds, especially since there are multiple currencies involved. Some companies get into trouble because they aren’t using the right tools to manage their cash. For example, if a global corporation uses an inaccurate forecast, it could fail to meet customer demand or may need to lay off employees during slow times. On the other hand, if it overproduces there can be negative repercussions in terms of labour costs for idle employees and unnecessary inventory carrying costs.
#5 – Compliance
International compliance issues can create challenges for businesses seeking to operate across borders. Gaps in compliance can result in unexpected consequences or disputes if something goes wrong and the company needs to do some type of wholesale re-negotiation of its supply chain.
For example, a food producer in France that is trying to sell its products in Germany may be subject to higher food safety regulations than those found in France. A global business operating across borders must be aware of the potential gaps between the countries it does business with and understand how they could affect operations and profitability. These gaps are not necessarily insurmountable; they are simply issues that need to be addressed by the international business owner or a professional external services provider.
#6 – Non-payment
One of the most common challenges that businesses try to avoid is non-payment. Due to the complex nature of global relationships and the time and cost required in seeking resolution, unintended consequences can occur if not properly addressed. The good news is that non-payment doesn’t have to be a long-term, unmanageable problem. By providing information on all agreements, clearly identifying who should pay for services provided and the process in place to resolve disputes, you can avoid the problems that come with non-payment.
#7 – More complex accounting
This is an especially big issue for Canadian firms with foreign subsidiaries. Accounting standards in Canada may different from most other countries, and using the International Financial Reporting Standards (IFRS) may reduce the need for adjustments to overseas income statements. However, even with IFRS, companies will still struggle with differences in local tax codes and accounting requirements, which requires that they pay more attention to their accounting practices when operating outside of Canada.
4 Key Lessons
- Lesson #1: Managing cash flow is one of the most critical elements of international business.
- Lesson #2: Get to know your clients’ needs and expectations, and be open to new ideas.
- Lesson #3: Don’t underestimate the cost (in money or time) of managing international payment processes.
- Lesson #4: Working with a third-party partner to help manage your international business relationships can be the key to success.
Accounting across borders can be challenging, but also full of opportunities! The accounting profession has a role to play in helping companies manage all of these opportunities and challenges. Companies that find ways to benefit from global commerce are likely to gain market share or experience efficiency gains that will lead to better profit margins.
If a company gains experience from expanding internationally then they will be better prepared to operate efficiently worldwide helping them to stay ahead of their global competition while ultimately running a more profitable operation for their shareholders.
If you would like to learn more about how cloud-based bookkeeping and accounting services can help elevate your business across borders in 2021, contact Sean at [email protected]
Want to learn more on how a multi-currency account can do wonders for your business? Reach out to Alice Fu and her team at OFX [email protected]