After having worked closely with importers across a variety of industries for over 15 years, and observing varying degrees of success, I have articulated the key areas that importers need to get right and the issues to be aware of.
Whilst the goal for everyone is to “make money” the key to success is in minimising the risk in each area.
Area 1 – Understand Your Product
Before you decide to import any product make sure you do enough due diligence in order understand your product in detail, including:
Its shelf life;
Quality;
Potential for obsolescence;
What alternatives are on the market;
Whether it requires a special approval to meet our local Standards;
Who else is selling the product;
What price can you sell it for?
Big Picture demand for the product in this country;
Warranty being offered by supplier;
Warranty that must be offered under law; and
Everything else you can think of.
The stronger understanding you have of the product, and the more you learn about it, the less risk there is of buying a lemon and being stuck with it, or clearing it for a substantial loss.
Area 2 – Secure a Solid Supply Source
A reliable source of product must be found. A good overseas supplier will meet many, if not all, of the following characteristics.
They only deal with your business in Australia, or maybe a couple of others at worst.
Deliveries are generally on time.
Quality of supply is consistent.
Goods received match the goods ordered.
The Supplier will stand by their product and honour claims if necessary.
They will offer trade credit after trading for a relatively short period of time.
Communication is concise. Misunderstandings or miscommunications can be easily overcome quickly.
They will work with your designated freight forwarder.
They operate professionally with no surprises.
They don’t let you down; and
You intuitively feel "right" dealing with them.
Have alternative supply sources at the ready if your current supplier starts to let you down.
Beware of suppliers that fall short in more than a couple of the above points. They will end up costing your business money.
Area 3 – Secure a Solid Distribution Source
Arguably the most important area is being able to sell your goods. Anyone can attend a trade show overseas or surf the web to find product to buy. The key is ensuring you can sell the product and turn it over as quickly as possible.
Don’t just buy and hope that you will be able to sell something you import.
Know who your customers are and have a clear selling/marketing plan.
Pre-sell as much of your product as possible.
Test the market. When bringing in a new product or range bring in as small a quantity as possible. Get feedback from your customers. Confirm their interest.
Make sure the products meet Australian Safety standards.
Area 4 – Ensure an Acceptable Gross Margin is Being Made
“A sale for the sake of a sale is the quickest way to fail”
I wish I could attribute that quote to someone, but I just made it up! This is a very important business principle. Put another way, unless you are making a reasonable margin on a product, why import it in the first place?
Assuming any due diligence done prior to importing the goods indicates that you can sell the product at an acceptable margin, it is critical to understand factors that affect the gross margin on product. It is NOT simply:
Selling Price $2.50
Cost
USD $1 converted at .75 $1.33
Add 15% for freight/Ins $0.20
Total Cost $1.53
Gross Margin $0.97
Gross Margin % 38.8%
This simple methodology is how many importers operate. They start punching numbers into their calculator, smile and thrust a calculator into your face as proof that what they are doing is right. This is a massive trap.
Other hidden or “indirect direct” costs faced by importers are an inevitability and must be minimised. All these costs eat into the Gross Margin. These may include:
Currency fluctuations. The dollar may fall very quickly making the cost of the goods much higher than originally expected. It is important to lock the dollar away, or a large portion of it when costing the price of goods. You need to speak to your advisor or bank about this if you are not doing this alread.
Perhaps even dealing directly in the currency of the country you are buying from may lead to achieving a better price, for example when dealing with China, ask the supplier for an RMB price, not USD. The reason for this is the supplier will not factor in a conversion mark-up from RMB to USD when they calculate their price.
Freight Importing Considerations. Seasonal pricing across the freight industry means that pricing sometimes goes up considerably during peak season. Understand when this is and base your costing on the peak season rates, not cheap season rates. Also, sometimes the unexpected happens in the freight industry which leads to unexpected costs. For example, a quarantine inspection or the supplier not releasing the goods due to overdue payments. This can lead to “demurrage” fees being paid and can add up very quickly to be thousands of dollars per container.
“Freight Out” considerations. Are you charging your customers freight to deliver the goods? If so, are you fully recovering this cost. Delivering goods to your customers at no charge eats into your margins. Sometimes your competitors don’t charge for freight, so you may have to match them.
Financing Considerations. If you need to finance your stock or debtors, interest costs are incurred. This also affects your margin and should factored in when pricing your product.
Claims. If any of your goods are faulty, or perhaps damaged in transit from your warehouse to the customer it is likely that a claim will be made against you and your customer will not pay the full amount invoiced. Perhaps you can pass on a claim to your supplier, but inevitably this will eat into your margin.
Other “Customer Relations” costs. You may have to give away some samples, or fly a late delivery to the customer so that a deadline is met.
Any of these events eat into your margin.
A good operator will be aware of the “indirect direct” costs and seek to minimise them.
Area 5 – Get the Logistics Right
The logistics area of an import business is basically getting the goods delivered to you, storing them and distributing them. Easy in principle! It’s about doing it as efficiently as possible and minimising your overall cost in this area.
One of my passions it to ensure that good technology and systems are in place for a business to “get the logistics right”. I have not included this in the scope of this article.
In terms of “Getting the Logistics Right” I will break this down into Importing the Goods, Storing the Goods and Delivering to Your Customers:
IMPORTING GOODS
It is important to work with a pro-active, trusted and reliable freight forwarder. They will liaise with your overseas supplier to ensure the goods will be ready when promised, arrange shipment, keep you informed of the schedule and notify you of anything out of the ordinary in a timely manner. Don’t fall for the trap of trying to save pennies on your freight forwarder. Go with someone you can rely on or it ends up costing you more in the end.
STORING/WAREHOUSING YOUR GOODS
Each business is at a different stage in their life cycle. It is important to consider where your business is placed in order to achieve the most efficient solution to storing your goods.
If your business is relatively new, it makes the most sense to store and despatch your goods through a third-party logistics company. Often your freight forwarder provides these services. It is critical to engage the services of a third-party logistics provider that will deliver to your customers on time.
A relatively new business should be very strategic about committing to a warehouse and seek external advice. There are significant set up costs involved that must be considered before any decision is made.
A more mature business is most likely going to lease (or potentially own) their own warehouse. It is important to ensure that the warehouse is utilised as much as possible. A lease should not be signed for too long a period and should include options to extend. It is important to remember that changing circumstances will either lead to too much room, or not enough. Either way this is not efficient.
Businesses with an under-capacity warehouse should consider either third party logistics for their fast-moving stock, offsite storage, or in the longer term, finding a bigger warehouse.
DELIVERING TO YOUR CUSTOMERS
Make sure you find a local freight Company that is both reliable and competitive.
Generally, unless you are a large established Company, where the freight companies are especially keen to win your business, the most appropriate solution is a freight broker. Freight brokers buy rates in bulk and can pass savings onto you. They can also adopt a “horses for courses” approach, whereby they use different service providers for different circumstances. For example, a local delivery will be transported by a completely different service provider to a delivery across the other side of the country. Some of the benefits of a freight broker is that they become a “one stop service shop”, you don’t need to deal with multiple freight companies, and you use the right service for the right circumstances.
Irrespective of whether you on charging your customers for freight, or not, it is important to achieve good freight rates so you do not upset your customers over this impost, and if you are not on-charging it, you are minimising cost!
Area 6 – Control Your Overheads
One of the most fundamental principles of any business is to control your costs, or overheads. Having costs at an efficient level in your business can be the difference between making a tidy profit or going out of business. Having a low overhead structure provide a competitive advantage.
Methods of controlling your overheads include:
Utilising technology to deliver a superior customer experience and managing your inventory.
Outsourcing certain services, for example marketing or CFO services.
Only employing people that strongly contribute to your business and can multi task.
Reviewing service providers annually.
Being mindful of unnecessary costs.
Costs often get out of hand, especially for businesses that have been successful in the past. A successful business will find the balance between incurring the right amount of cost for their business activity.
Area 7 – Be on top of the Finance Function
This is a broad area that often falls outside the expertise of entrepreneur.
The finance function includes:
Knowing how your business is performing at any given time;
Being able to track products that are profitable and those that are not;
Planning your cash flow, including being able to pay your creditors, and especially suppliers, on a timely basis.
Having the right finance facilities in place;
Having systems in place, both technological and human.
Having a deep understanding the statutory requirements of business;
Have the right advisers to help guide you through difficult issues;
Protecting your assets
An experienced accountant, business adviser or consulting CFO should be able to help guide you through the finance function and all other areas of your business.
Conclusion
There is so much scope in our economy for passionate entrepreneurs to be successful importers. The reality is that many people fail due to the many pitfalls that can present.
The key is to be aware of each area and the potential pitfalls that may present. No one is perfect, and we all make mistakes. It is often those that minimise those mistakes that are the most successful.
If you would like to discuss any of the above I can be reached at mark@cfoconsultant.com.au.
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