If you ask a business owner about the biggest threat to their profit margin, 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 leaders ignore what may be one of their biggest risks: foreign currency volatility. From small operations to medium-sized enterprises, managing incoming and outgoing foreign payments is a regular task for many. Working with foreign partners like international suppliers and vendors can help a business save on production costs, expand their customer base and grow to a global operation. Yet international payments are subject to foreign exchange rates, which can vary unexpectedly.
Myths about Foreign Exchange for Business
Volatility isn’t that bad: To a degree, all currency pairs actions experience some fluctuation. For example, if a US supplier purchases £10,000 worth of supplies from the UK each month, their August 2019 invoice would cost about $12,150 USD. Yet two months later the cost could be over $500 more, simply due to an increase in the exchange rate. For £100,000 invoice the difference would be a steep $7,290 USD. Such unpredictability may make it difficult for a business to effectively manage their cash flow and could erode profits.
Payment in USD: 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 will eventually conduct a currency exchange to their local funds. To account for any possible rate shifts, some vendors will pad their total cost to protect from potential lost profits.
Risk management is for large corporations: FX risk management is a valuable tool regardless the size of the business. Businesses with foreign exposure should consider exploring ways to help reduce their possible profit loss and manage uncertainty.
Hedging strategies are complicated: Strategies are employed by very small companies and very large corporations. Depending on the nature of your business, they can be straight forward, simple and automatic or more complicated. Depending on how complex your business is, a hedging strategy will generally reflect that reality. Because of this, it’s very important to consult a risk management specialist who spends the time to get to know pertinent aspects of your business so they can help you construct a strategy that is suitable for your business and help schedule revisions so your plans can evolve.
How do you mitigate foreign exchange risk?
There’s a wide variety of available tools to help you manage currency risk including forward contracts, future payments, market order, option contracts 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. Our risk management team can help organizations evaluate and construct a comprehensive solution.
Disclaimer:
Convera has based the opinions expressed in this webpage on information generally available to the public, and such information or opinions are strictly for illustrative purposes only. Business between you and Convera shall be governed by the applicable terms and conditions provided to you before you undertake any transaction or commercial relationship with Convera.
