Articles

Why currency costs matter

By Smart Currency September 19th, 2014

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Why should a company with international payments, including receipts, care about foreign exchange?

Trading overseas can be challenging for businesses, given the volatility of currency markets. Finance Directors need to minimise losses on currency conversions, as unfavourable currency costs can add up and prove damaging to a business’s profit margins. Money and time that is lost on ill-timed currency exchange conversions could have been spent running other aspects of the business, or put towards business growth. Furthermore, savings on currency costs do not only improve the bottom line; they also benefit key business sections like procurement, sales, finance and human resources directly.

 

How do you know if you have a foreign exchange problem?

  • Do you know when to purchase currency?
  • If not, do you have a trusted and pro-active trader to guide you?
  • Have you set your budget rate optimally?
  • Do you have a currency-purchasing strategy?
  • Do you know how much you can save by using specific currency-buying strategies?
  • Do you know your currency costs from the bank?
  • Do you know how to minimise your add-on costs?
  • Are your current currency payments quick and easy?
  • Do you spend minimal time on paperwork (e.g. with banks) that could be better spent on other aspects of the business?

If you answered ‘No’ to one or more of the questions above, you need to review your currency-buying strategy.

 

Why should you address any foreign exchange problems?

Knowing when to purchase currency will help protect your profits against losses incurred by unfavourable exchange rates, while having a tailored currency-buying strategy will allow you to budget more effectively.

Optimising the currency function of your finances will allow you to allocate the money spent and time saved on running other aspects of the business. Depending on the volume of your currency purchases, the savings you could make with the right kind of strategy could be channelled into business expansion/growth.

 

How should you address them?

Depending on the problem that you are facing, you may need to:

  • Split risk up into transaction risks and economic risks.
  • Consider currency-buying strategies that are tailor-made for your industry and business.
  • Work with a currency specialist that understands the importance of cost-cutting on your business, and does not burden you with extra fees.
  • Work with a currency specialist that values the importance of your time, whom you can trust.

 

Tips for maximising savings and mitigating risk from international payments

  1. Know your budget rate.
  2. Understand the consequences of currency fluctuations.
  3. Ensure that you are not paying too much on each currency transfer through loose rates and additional charges.
  4. Stem slow payments, as they could mean losing out on a deal.
  5. Have a trader monitor the rates during invoice periods to help you try and buy/book at the “right” time (although this can never be guaranteed).
  6. Ensure your provider keeps you updated on market movements and provides you with the knowledge needed to benefit from market movements.
  7. Be aware of the products and services available to you and implement the best-fit strategy.

 

Specific solutions & risk management strategies

There are a number of solutions and strategies for saving money and mitigating risk on your international payments.

These include:

  • A Spot Contract
    A spot contract lets you buy or sell currencies at a specific exchange rate. Businesses that can’t estimate their currency needs in advance will need to buy ‘on the spot’. Exercise caution, though: when buying at ‘spot rate’ you can be vulnerable to currency market volatility.
  • A Forward Contract
    A forward contract lets you set a currency exchange rate now for future use. This is especially useful if you can plan payments in advance.
  • A Flexi-forward Contract
    A flexi-forward contract combines elements from both spot and forward contracts, allowing you to set a budget rate but also to buy ‘on the spot’, when required.

 

Assess your currency-buying strategy

If you are making international payments, ensure that you are using the right strategy for cutting down on currency costs. Every business is different, so ensure that your methods fit your specific business’s requirements.

To speak to an international payments expert, contact us at Smart Currency Business by calling us at 020 7898 0500 or e-mailing us at info@smartcurrencybusiness.com