Memorandum: Considerations for Export Business Expansion

To: Board of Directors
From: Finance Director
Date: [Date]
Subject: Opening Export Business to International Markets

Following the proposal to expand our business into export markets, the following key points must be considered before making a final decision:

i) Export Pricing and Profitability

The pricing strategy for export markets must account for additional costs, such as shipping, insurance, customs duties, and exchange rate fluctuations. We will need to ensure that the export price is competitive while maintaining our target profit margins. Since we have surplus capacity, products may be priced on a marginal cost basis, but we must still consider the full cost structure in the long term.

ii) Credit Terms and Methods of Obtaining Payment

Selling internationally introduces longer credit terms due to shipping times and foreign market payment practices. We should consider the use of documentary credits or letters of credit to mitigate payment risks. The terms of credit will also depend on market practices in the target countries, and we need to assess the risk of delayed or non-payment.

iii) Risks and Methods of Avoiding Them

The key risks in entering export markets include exchange rate risk, non-payment, political risk, and transportation issues. To manage these risks, we can hedge against currency fluctuations through forward contracts, require pre-payment or confirmed letters of credit, and engage export credit insurance to protect against non-payment. Political risks may require entering more stable markets initially.

iv) Forms of Representation or Local Organization in Export Markets

We should explore partnerships with local agents or distributors in the target markets who are familiar with local practices and can help establish our brand. This could also reduce the cost of setting up direct operations overseas. Alternatively, setting up a sales office may provide greater control over operations but will involve higher initial costs.