3 Risk Management Tips for Importers from William Shakespeare

William Shakespeare imparts timeless advice to any merchant or importer in his play, The Merchant of Venice.

The play opens with Antonio, the “Merchant of Venice,” expressing a sense of profound depression. The first line of the play hears Antonio confess, “In sooth, I know not why I am so sad.”

His companion, Salerio, thinking of his friend’s vocation, ventures a guess as to what afflicts Antonio. “Your mind is tossing on the ocean,” Salerio guesses. “I know, Antonio / Is sad to think upon his merchandise.”

Now every importer worries about his or her merchandise from time to time, but worry has practical limits. You cannot worry day in and day out without it having a negative impact on your business.

The solution to such anxiety is to put in place risk management strategies that will give you the peace of mind necessary to get on with your affairs. Any merchant worth his salt would naturally take such precautions.

Thus we hear Antonio refute Salerio’s conjecture:

Believe me, no: I thank my fortune for it,
My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate
Upon the fortune of this present year:
Therefore my merchandise makes me not sad.

There are 3 risk management tips encapsulated in this one verse, so let me break down these little nuggets of wisdom one by one:

“My ventures are not in one bottom trusted”

Here we have the classic strategy of not putting all your eggs in one basket. An importer should never have all of his or her working capital tied up in one shipment.

Rather than placing large orders, it is far safer to break your order into a series of smaller shipments spread out over a period of time. By doing so, you are not only mitigating against catastrophic risks such as damage due to rough handling, you are also better managing your inventory turnover and cash flow.

“Nor to one place”

Do not entrust all your working capital with one supplier, for if they fail to deliver in a timely manner, your business will be greatly impacted for that season. Far wiser is the importer who works with a handful of suppliers rather than relying on just one.

Spreading your orders out across multiple suppliers splits your risk and wards against the adverse effects of a supplier’s non-performance. At the same time, using multiple suppliers enables you to shift production away from one factory toward another should quality problems emerge.

“nor is my whole estate / Upon the fortune of this present year”

This point is more subtle but equally important. Ask yourself: What would happen if my business this year was a complete failure? Would I be able to survive until things picked up again?

As an importer, you would ideally have a reserve set aside capable of keeping you afloat for at least 12 months. In the event of a severe downturn, a twelve-month buffer will give you the time necessary to reformulate your product line and marketing strategy.

So there are 3 risk management tips for any importer – straight from the Bard himself. Take these tips from the Merchant of Venice and be not sad to think upon your merchandise.

Forward Currency Exchange Contracts for the Small Importer

If you’re importing, chances are you need to buy foreign currency on a regular basis. Naturally this currency exchange becomes yet another risk factor in your business which you must mitigate.

Big businesses have access to exotic systems for managing currency exchange risk, among which is a financial product called the forward currency exchange contract. As a small importer, it is possible in certain situations for you to use this method to manage currency risk, too — but before doing so you should be aware of the facts.

A forward contract is an agreement between you and a currency dealer to purchase a certain quantity of foreign currency at a certain price on a certain date. For example, you might agree to buy 950,000 Japanese yen for 12,195.88 US dollars on November 11th of this year.

Once you enter into this contract, you are obligated to make that purchase when the appointed time comes. If the exchange rate has changed in your favor, you will be losing money. On the other hand, if the rate has gone against you, you will be delighted to have had the wisdom to arrange the forward contract. In that case, you will be getting a better rate than if you had bought the currency in the spot market.

It’s important to understand that a forward contract is not meant for speculative purposes, since it is largely impossible to predict currency exchange fluctuation. Indeed, the purpose of the contract is to remove the need to speculate on where the exchange rate will go.

With a contract rate firmly locked in place, you can focus on more important aspects of your business. You will be able to sleep at night knowing you won’t lose your shirt if the currency markets turn against you.

So where do you go to get a forward contract? A quick search on the Internet might give you the impression that a bank would be the logical place.

Not so. Walk into a bank and ask your banker about forward contracts, and you will be rewarded with a smirk.

The banker knows that a forward contract is for medium and big businesses that are managing millions of dollars. And you’re not part of that club.

Generally speaking, a forward contract is not an appropriate solution for managing currency risk at the small business level. So, before continuing with forward contracts, let me point out two simple ways to manage currency risk without resorting to a forward contract.

First, you can just buy what you need in advance. Let’s say you are about to place an order with a lead time of 90 days and you’re anxious about where the exchange rate might be headed in the interim period. If you have extra cash on hand, you can simply buy what you need in advance and stash it in a bank account for when the final payment is due.

Second, you can price the currency risk into your profit margin. Looking at historical rates, you know that the currency pair has not fluctuated more than 10% over the previous 12 months. If your markup is 100%, you can live with a 10% change in the exchange rate. Chances are very good that it won’t make a move large enough to erase your profits. And, on the upside, you have a 50% chance the rate will move in your favor, thus improving the profitability of your shipment.

So, before going with a forward contract, ask yourself whether simply buying the currency in advance or pricing currency risk into your markup will be sufficient to mitigate currency exchange risk for your business. Both methods are effective when you are dealing with a foreign currency that is relatively stable with respect to your home currency.

Nevertheless, there are contexts when you might need a forward contract. Certainly one of its uses comes when you must make a payment in a currency that fluctuates wildly — say, because of political risks such as war.

Another situation which calls for a forward contract is where your profit stands to be wiped out by an unexpected fluctuation. (If this is the case, you should ask yourself whether it is wise to take this level of risk for such a small potential reward.)

If you find yourself needing a forward contract, by all means use one. But don’t go to the bank asking for one, as you’ll just be rebuffed.

Instead, you can get a forward contract through an online Forex service. These online services are geared to small international traders, and they will be more than happy to sell you a forward contract where a bank would not normally do so.

I’m not going to endorse any particular service. There are many of them out there — just do an Internet search for online forward exchange contracts and you will find what you’re looking for.

An online Forex service is the best way for small businesses to buy a forward contract. They’re also better for spot purchases than a conventional bank as well.

But before you jump in and buy that forward contract, just remember that it is a contract. If the market moves in your favor, you will end up paying more than the spot price.

That’s the price you pay for the peace of mind of a forward contract.

Hiding a Shipment from Import Genius

You may worry about services, such as Import Genius, which let users search vessel manifests for details about shipments including the names of suppliers. As an importer, how do you keep competitors from spying on you?

That’s the question which quality assurance specialist Renaud Anjoran takes up in a recent post on how importers can use a Hong Kong trading company for privacy. In a nutshell, this strategy involves setting up a company in Hong Kong to act as an intermediary between you and your Chinese suppliers, thus hiding details about them.

Such an arrangement may work well for big businesses, which have the resources to establish an elaborate supply chain. But for the small importer, this strategy would be a waste of time and energy. Fortunately there are much simpler and economical ways to tackle this problem — if indeed it is a problem in the first place.

So first ask yourself: is it really a problem that competitors know who your suppliers are? You may gain nothing by maintaining a veil of secrecy over your importing activities. After all, every industry is a village and there are likely only a handful of competent manufacturers in the world who can produce goods to your required specifications. It is likely that your competitors already know who your suppliers are just by looking at your products.

But if secrecy is a must, there is a simple way to make sure your company name does not appear on websites like Import Genius. All you have to do is ask your shipping agent to have the Bill of Lading made “to order” of your customs broker in the US. (Here is an example of how this kind of Bill of Lading turns up in Import Genius.) By doing so, you assure that your broker’s name — not yours — shows up in the online trade data. The total cost for this layer of privacy is exactly nothing. That’s a lot easier than setting up a company in Hong Kong.

Now if you really wish to maintain an intermediary between you and your supplier, there is nothing stopping you from incorporating a new company at home. Here I’m talking about creating a second, seemingly unrelated business with the sole purpose of bringing the goods into the US. In this scenario, your company, ABC Marketing Inc., would purchase its merchandise from XYZ Importing Inc. As a domestic sale, you have perfect privacy, so your competitors would never know that ABC was doing its buying through XYZ.

For a small or medium business, there really is no need to establish an intermediary in Hong Kong, so why would anybody do so? I suspect it has something to do with exporting profits, where they can be safely stashed in a Hong Kong bank account to avoid taxation.