If you ask a business owner about the biggest threat to their cash flow, they’ll likely say a poor sales cycle, labor costs, and direct competition. That’s understandable, as many of these factors can be costly or outside of a company’s control. Yet many business leaders ignore what may be one of their biggest risks: foreign currency volatility.
From small businesses to enterprises, managing incoming and outgoing foreign payments is a regular task. Working with foreign partners, such as international suppliers and vendors, can help a business save on production costs, expand its customer base, and grow to a global operation. Yet international payments are subject to foreign exchange (FX) rates, which can vary and fluctuate unexpectedly. That’s where currency risk management comes in. However, businesses that are just starting with cross-border payments often believe FX risk management is too complicated, costly, and risky.
Let’s dive into some frequently-mentioned misconceptions.
Myths about foreign exchange
Common myths about FX risk management, often believed by businesses, include that it’s too complicated, that only large corporations need it, and that currency volatility can be ignored. In reality, proactive risk management tools are available for all businesses to help manage volatility and protect cash flow.
FX myth #1: Currency volatility isn’t that bad
To a degree, all currency pairs experience some fluctuation, especially during volatile times. For example, if a US supplier purchases £10,000 worth of supplies from the UK each month, their March 2026 invoice would cost about $7,460. Two months later, the cost would be $7,350, simply due to a decrease in the exchange rate. For a £100,000 invoice, the difference would be a $1,100. Such unpredictability is hard to ignore and may make it difficult for a business to effectively manage its cash flow.
FX myth #2: Using USD for global payments avoids volatility
Even using USD with a foreign party may not avoid the issue of volatility. Billing in US dollars is common in many parts of the world, due to the widespread use of the currency. Yet an international partner who accepts USD conducts a currency exchange to their local funds. To account for any possible rate shifts, many vendors increase their invoices to protect themselves from potential losses.
FX myth #3: FX risk management is only for large corporations
FX risk management is a valuable tool regardless of the size of the business. All businesses with foreign exposure should consider exploring ways to help sustain their growth goals and manage uncertainty.
FX myth #4: Hedging strategies are complicated
Very small companies and very large corporations use hedging strategies. Depending on the nature of your business, your hedging strategy can be straightforward, simple, and automatic, or more complicated. Moreover, depending on how complex your business operations are, a hedging strategy must generally reflect that too. Because of these many variables, it’s very important to consult a risk management specialist who spends the time to get to know pertinent aspects of your business.
An FX risk management expert, for example, from Convera, can help you construct a strategy that is suitable for your business and help schedule revisions so your plans can evolve as the situation and your needs change.
Learn how small businesses can start planning FX strategies.
It’s important to note that hedging products are derivative financial instruments, which may expose you to risk should the underlying exposure you are hedging cease to exist. If you are not confident about your understanding of derivative financial instruments, or foreign exchange and related markets, we strongly suggest you seek independent advice before making the decision to use these instruments.
How do you mitigate foreign exchange risk?
There’s a wide variety of available tools to help you manage currency risk, including forward contracts, FX options, market orders, and more. It can be overwhelming for any business leader to formulate the optimal plan, especially when many businesses find it challenging to identify where their cash flow is exposed to currency volatility. Convera’s risk management team can help you evaluate and construct a comprehensive solution.
