Australia has a proud tradition of high quality manufacturing but for many years it has struggled to compete on cost with lower-wage economies such as China. Even though it could be argued that higher levels of business investment make Australian workers more productive, in many areas of manufacturing it is always going to be hard to compete: therefore, SMEs should certainly think about outsourcing some of their factory work overseas.
The most obvious option is China, although other Asian economies offer their own advantages and have specialisms in particular fields. China isn’t as cheap as it once was, but on the other hand, it is modernising rapidly so that Chinese factories can now fulfil more of the needs of Australian SMEs than ever before.
Even when shipping and other logistical costs are taken into account, businesses in some industries can expect to save a significant amount, sometimes being as much as 30% or more, by shifting manufacturing to cheaper countries. So why aren’t more entrepreneurs and business owners doing it?
Offshore Manufacturing Is Risky And Requires Cash Flow Cover
There are a number of obstacles for smaller Australian businesses seeking to move their manufacturing requirements offshore. Quality can be compromised; legal and communication issues must be navigated; partnerships have to be built; logistics organised and duties paid. An even bigger stumbling block can be the upfront costs associated with the need for scale and paying foreign suppliers before you even see your goods.
Let’s face it, that list is enough to put most people off, but there are solutions to all of these issues, and they can not only enable serious cost savings, but they can actually improve your cash flow situation as well.
The complications of setting up a manufacturing operation abroad are too numerous to cover in one blog, so we’ll start by looking at the cash flow issues: after all, you’ll want to know that you can pay for this step-change in business practice before you invest too much time in planning the details.
The Cash Flow Impact
Before you see a cent from your foreign-manufactured goods, you will have to pay the following:
- An initial deposit to the factory – typically 30% of their sell price.
- The balance of the manufacturing costs on completion.
- Freight costs: your product will typically spend 30 days at sea.
- Duties and Import Taxes: payable on arrival – without payment, your goods won’t be unloaded in Australia (we note that not all products incur import duties).
- Your usual warehousing, distribution and sale costs.
Once you’ve paid all of those, you still need to wait until all your products have reached their intended destinations before you issue your invoices and then your customers will typically have 30 days or more to pay you.
The upshot is that the cash flow impact from initial deposit to when customer pays is a whopping 240 days on average. The cash flow impact from balance paid to factory to when customer pays is typically 150 days. The cash flow impact from arrival in Australia when Freight, Duties and Import Taxes are payable to when customer pays is around 90-120 days.
Financing the Cash Flow Gap
With such lengthy periods between initial investment and getting paid, most SMEs will need to put specific funding in place to finance the move to manufacturing abroad. If this is not done thoughtfully the interest on business loans from overdrafts can easily offset the cost savings of offshoring production.
Specialist financing solutions can be much more cost effective. Purchase order financing and letters of credit are specifically designed to help businesses meet the upfront costs of outsourced manufacturing. However, even these leave a significant cash flow gap after duties and taxes have been paid.
Only when combined with cash flow finance can these specialist import financing solutions really work for small and medium size businesses. By cutting out the final wait for payment and covering the initial costs, such a system brings the cash flow impact down to manageable proportions.
As Fintech gets ever more sophisticated, it is now possible to quickly build tailored business funding solutions that can not only narrow the cash flow gap, but actually gives you more certainty and better funding cover for your business. This is an area TIM specialises in and our sales solutions staff will be happy to show you how a funding package can be built that will unlock the savings of manufacturing abroad for your business and enhance your working capital.
“Get Tomorrow’s Cash Flow Today”