Foreign companies have long looked to China as a means of lowering manufacturing costs and gaining access to a large, developing market. Abundant natural resources, cheaper labour, big local markets and a developed supply chain base, combined with local government incentives including tax breaks, special investment treatment and repatriation of profits have been attracting international small and medium-sized enterprises (SMEs) to China since the early 1980s. Investing halfway across the globe is not without its challenges, though, and there are many problems and difficult issues a China "first-timer" will encounter. For SMEs especially, understanding these problems and issues will be the difference between making and losing money on the mainland.

The following are some of the financial, tax and accounting issues an SME will face when moving into China:

Multiple bank accounts

Why do businesses in China need to open so many different bank accounts? Why can we not just use one banking institution to handle all of our transactions? Unfortunately, SMEs in China are likely to use at least two or three different banks when running operations on the mainland.

SMEs need to open a capital account to receive foreign investment capital from the holding company, a settlement account in foreign currency if the company has overseas business, and a basic renminbi bank account to pay salaries and other expenses in local currency.

It is also a normal practice to have two additional, separate bank accounts for making payments to the state tax authorities. This bank is selected by the authorities themselves.

Additionally, you may need to open a separate loan account to receive loans from the mother company. All of these bank accounts have different functions, and the company concerned should clearly define them, including arranging for the different signatory authorisations, security levels and related arrangements.

From a practical perspective, you may also have to consider choosing a bank logistically closer to your operation base or office, reducing the time to withdraw money or issue checks. Finally, as more and more foreign banks are allowed to operate on a much broader scope in China, the foreign investor will be faced with even more options from which to choose.

Initial cash-flow problems

International investors are likely to face cash-flow problems in the initial investment period: Unforeseen expenses in the budgeting phase (we hear this a lot), slow sales revenues, longer credit terms given to clients in order to open up new markets, deposits required at customs and immediate payment requirements by local suppliers before they get to know your company's credit standing. All of these may put an unexpected dent in your wallet at the early stages of your investment.

If you are stretched and need some immediate cash, please note that different cities in China may have different local policies on foreign currency control and lending.

Tax invoices, forex control

SMEs usually need to almost immediately purchase equipment, rent offices, buy raw materials and hire local staff within China. All of these expenses should, in an ideal world, be paid from the company's local bank account and not from any other sources (eg a holding company's money or an investor's cash). What's more, the company should give clear instructions to its staff in order to obtain legal tax invoices from local Chinese vendors.

When asking local suppliers to provide legal value-added tax (VAT) invoices, some may demand more money, ie an additional 6 percent of the total amount (VAT is applicable to small taxpayer suppliers), while others may even refuse to provide legal VAT tax invoices.

SMEs usually find it difficult to explain to the tax authorities where this money has gone under such conditions, and the company may face a tax penalty in the future. Therefore, what foreign companies need to remember is that they should make clear whether the price quoted by the local suppliers is tax-inclusive or tax-exclusive.

Total investment

If you are required to obtain a loan from the mother company or a banking institution to solve initial cash flow problems or to pay Chinese local suppliers to finance production, according to SAFE policy, a subsidiary in China is not allowed to get a loan from the mother company if its total investment is equal to its registered capital, and no gap has been considered during initial setup stages. Because of this, it is important to structure investments correctly from the beginning by paying attention to the necessary start-up capital required and the borrowing options that may be considered should the need arise.

It should also be noted that the registered capital amount should be based on the business's specific cash-flow needs to operate it until it develops its own cash-flow to support it. Registered capital should not be based on any minimum amounts - otherwise, the company will simply run out of money. "Minimum guidelines" should be treated with caution and the amount actually required should be based on your practical financial needs.

VAT and customs policies

Chinese customs provide preferential treatment to foreign companies as a tool to encourage them to set up operations in certain industrial sectors. For example, some foreign enterprises are entitled to preferential VAT treatment to import equipment tax-free and use such equipment within the total investment. Investors need to be aware of these policies to correctly plan their investments and ultimately save costs.

These are only a few of the preliminary issues SMEs will face during their initial investments in China. Companies should not assume that what applies on an their home turf or in other investments made elsewhere necessarily applies in China. SMEs are encouraged to use common sense and check all information and data twice.

Until a clear picture has formed, SMEs need to question everything they are told, and above all should not take for granted advice given by internal staff, as in some cases there may be a vested interest, an ignorance of international tax planning or a lack of practical experience that could possibly affect operations down the line.