They say never count your eggs before they hatch, and for good reason. In an industry like the international trade business, profitability could appear to be very high at first glance, then unexpected events, expenses, and even time lost can cause the full margins to dwindle before your eyes.
There are many reasons trades go bad and businesses lose money and there are also reasons businesses maximise the opportunities they have and make huge margins on every export transaction.
If you’re in situations where you always lose money or don’t want to experience a situation where you get to lose money on an export transaction, here are 6 principles you must follow to ensure you maximise your profits on every export transaction with losing any of the already calculated profit margins.
1). Avoid The Temptation Of Waiting For Price To Fall & Buy immediately you get an LC or Part-Payment:
Sometimes exporters receive an order for a commodity and then choose to wait for the price of the commodity to fall because of expert projections, or in the case of agricultural products, the start of a new season which usually accompanies price falls.
In the year 2020, many exporters received ginger export contracts around September/October and instead chose to wait for the prices to fall even further as the season was about to start before buying and shipping their gingers. The complete opposite happened. The prices rose sporadically and the profit margins of many exporters fell by as much as 70-90%, with several refusing to fulfil the contracts.
If you’ve calculated a good selling price for a product based on current market realities and have received an LC or part-payment for the transaction, don’t wait for the price of the commodity to fall. Go out of your way and purchase the product immediately to ship to the buyer on time. While there may be a chance of a price fall to grow your profits, there’s also a huge risk of a price rise to crash your margins.
2). Assume The Weight Of The Cargo Will Drop by 20-30% After Processing:
When buying agricultural products for export, the goods are usually processed and cleaned before transported to the port for shipping. As a result, the weight of the volume purchased would usually drop because they’re largely purchased in their raw forms before been processed for export.
Most exporters make the mistake of calculating 1 for 1 when buying these commodities. Some even assume they may lose no more than 5% of the product after they’re done processing it.
The sad reality is most of the time, the products lose about 20-30% of their weight, causing the exporter to lose 20-30% of their investments, which may result in an overall loss for them.
Before you offer a price to a buyer, always assume you’d lose about 20-30% of the weight of the commodity if bought in its raw form. This way, you’d be prepared for anything.
But regardless, few times the goods may actually be 1 for 1. And in rare cases, you could get more than you paid for.
3). Factor Miscellaneous Expenses Of At Least 2-10% Of The Total Cargo Value:
During the transaction cycle of an export transaction, there are many events that could occur, and sometimes, these events could cost the exporter some expenses they never bargained for, thereby reducing their profitability.
It’s important that you always factor miscellaneous expenses of between 2-10% as a wildcard in your trades because anything could happen at any time.
4). Make A Down-Payment To Your Suppliers To Ensure They Hold A Price For You:
If your suppliers are people you trust, you should make a downpayment immediately you get an LC or part-payment from your buyer so that they can hold the price of the commodity for you.
When exporters don’t do this, they get to pay more if the price goes higher, which may likely be the trending case, and in the process, make lesser profits than they had bargained.
By committing yourself with a part-payment to your local supplier, you’re ensuring you can secure the goods at the price you have projected once you’re ready.
5). Have Workers You Can Trust At Sourcing Points To Ensure They Procure & Monitor The Process For You While You Focus On Growing The Business:
It’s important you have a procurement officer who can visit the sourcing points and be there to ensure that the goods are the exact quality as advertised and to also monitor the cleaning/processing to avoid you getting cheated.
The reason this is important is that if you have to physically do it yourself, you’d be unable to focus on marketing and sales for more clients that could potentially buy more commodities. You’d also be unable to focus on other important aspects of the business, like setting up the logistics, freight forwarding, daily operations, and much more.
By having a procurement officer, you open up space, time, and opportunities for you to focus on other things that matter to the growth and success of your business. Plus you also save more money on travel and living expenses, as business owners usually like to spend far more on themselves than on their employees when on a business trip.
6). When Procuring Commodities At The Source, Try To Buy Everything In One Day:
Once you have a contract and a payment guarantee in place, if you can, buy every single commodity in one day.
The reason for this logic is the prices of commodities are unstable. They could be going higher or lower, but are most always going higher as demand continues to grow year-in-year-out as global population grows.
If you spend time buying slowly and waiting to see what the prices are, the commodity price could be rising daily and as you buy at various higher prices, your margins would be unpredictably lower than you ever predicted.
7). Put An Expiry Date On The Price:
Sometimes you’d agree on a price and sign a contract with a buyer, but the buyer’s bank would take more than 1 to 3 weeks to issue a Letter of Credit or credit you with the part-payment.
Considering how commodity prices change daily or weekly, accepting to still execute at the originally agreed price could cost you your investment as the price of the commodity in the local communities could have well risen by the time you’re getting the LC or part-payment.
Ensure that anytime you quote a price to a buyer, you give them an expiry date of between 5 to 10 days and also ensure that if you sign a contract with a buyer, the price of the commodity on the contract should be subject to change if the LC or part-payment has not been received within a time period.
What are your thoughts on these 7 ways to ensure you maximise your profits on every export transaction? Let me know by leaving a comment below.
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