As you expand into overseas markets, something you will have to address will be the currency exchange aspects of your international business. That may sound like a whole heap of hassle you would rather do without but it really doesn’t have to be that way.
Well managed foreign exchange risk can actually be an opportunity and not just an irritation. On the flip side of that, poorly managed foreign exchange risk tends to be expensive. So where do you start?
There are advantages to holding bank accounts in the relevant currencies. It affords you a great deal of flexibility in holding currencies, timing conversions and managing transfer costs. Most currencies can be held in accounts in the UK but you may find it is cheaper and easier to hold accounts in the relevant countries. Some bank portals allow control of overseas accounts through an online solution. It is worth checking facilities with your own bank.
If you do so, check whether there are any receiving fees for inbound transfers. Some banks, especially Spanish banks, charge a percentage of the transferred amount and that can run into thousands of pounds in extra costs. You can usually avoid this if you pay tranches of less than €50,000 at a time but you can negotiate with the Spanish bank to agree a fixed cost in advance.
It is best to refuse to accept currency cheques or drafts for payment unless you have a bank account in the country the cheques are drawn on. The costs are prohibitive and the delay in receiving clear funds can take 6-8 weeks.
If you need to make Euro payments anywhere within Europe, use SEPA transfers whenever possible. These offer much lower costs than traditional wire transfers and are just as speedy. For everywhere else, international SWIFT transfers are the tool for the job and most banks and brokers offer this format.
Buying and selling
It is always worth thinking well in advance on exchange rates. Some companies cover all their risk the minute it is apparent and others wait until the last possible minute before even booking an exchange rate. Both choices have their advantages and pitfalls.
Monthly fluctuations of 5 per cent or more are the norm and that can be very costly or hugely frustrating if you miss the better rate for the sake of a bit of basic forward planning. That planning doesn’t need to be any more than a spreadsheet showing requirements and a strategy to cover the risk. However, Murphy’s Law dictates that last minute booking is rarely a good option.
Use the markets own tools for best currency management. That might include booking forward contracts to fix an exchange rate today for settlement up to two years ahead or placing automated orders to guarantee a ‘worse case’ exchange rate whilst leaving room to take advantage of positive exchange rate movement.
More on foreign currency:
Shop around amongst banks and brokers for the best service, not just the best rate. If you are new to the foreign exchange market, expertise and guidance will be invaluable and these are commodities which are rarely on offer through online or call centre bank services or even at local branch staff.
If your currency requirements are sizeable and long term planning is required, you may wish to use Options. These allow you to choose whether to exercise your right to buy or sell at specified levels. They either cost a premium to secure or they are more complicated structures with positive and negative aspects. As a rule of thumb, if there is no premium, you need to ask, ‘what is the catch?’ There will be one and you need to know all the pros and cons before agreeing to the deal.
Whether you have a blanket policy on foreign exchange, adopt a more ad hoc approach or just wing it, the management of your foreign exchange needs will impact P&L. That might be a positive impact or a negative one but the impact will be felt. If you don’t want the figure to have brackets around it when your accountant is done, it is always worthwhile setting your policy out in advance, being prepared to change and enlisting some expertise to manage things with you.
Without a plan, your profit is all riding on a gamble and that is no way to run a business.