Businesses that trade in goods rarely escape from the complexity of global transactions and exchange rates. Selling to overseas markets is a goal many businesses aspire to succeed in, and hundreds of local businesses are already open to selling to overseas buyers, including through marketplace platforms such as eBay and Amazon to extend their market reach.
International transactions are also a reality along the supply chains of goods, with most goods – or their components – manufactured overseas. Overseas suppliers can also offer better than local rates, motivating many businesses to use them selectively.
Across each of these types of transactions, expenses in the form of exchange rates come into play, and the more funds a business exchanges regularly, the higher the impact on its bottom line. Exchange rates change continuously and can also be volatile – especially when there is global instability – presenting higher unexpected costs for businesses.
Such volatility can affect any business, of any size, that generates sales from overseas trade, imports or exports goods, contracts offshore suppliers, or has plans to expand globally.
How to manage fluctuating exchange rates?
Exchange rates can work for or against a business and savvy leaders have developed strategies to minimise the cost. Here’s what you should know about exchange rates.
Get the best of both worlds
Using a global supply chain can increase profitability by reducing the cost of manufacturing, goods and labour. However, businesses with global supply chains face an additional risk: When exchange rates move, so do the cost of overseas goods, labour and materials.
The exchange rate for a currency may favour importing from an overseas supplier one day, which can create a false sense of financial security. When it changes, these imports become more expensive. This can be risky for businesses who are dependent on overseas suppliers.
Poor exchange rates and hefty transfer fees can also cause operating costs to spiral out of control, making it harder for businesses to stay on top of finances. Most suppliers prefer to be paid in their local currency, which may be necessary to retain their services.
To stay out of risk, businesses and suppliers could agree on beneficial payment methods before working together. Digital payment methods can also simplify currency considerations.
Exchange rates make businesses to gain (or lose) a competitive edge
A strong currency can impact a business’s competitiveness in a local or international market. When the currency in the business’s country depreciates relative to other currencies, its goods or services will become cheaper to foreign customers, which can give them a temporary competitive boost in new markets and a better chance at global success.
At the same time, exporting to other markets becomes expensive, which can hinder plans for global sales growth. However, it can give way for new local openings as there is now greater demand for locally produced products. Business with a global footprint should monitor exchange rates to minimise high expert costs or take advantage of reduced import costs.
Managing exchange rate fluctuations
We live in uncertain political and economic times, to which exchange rates are sensitive. The simplest way to avoid exchange rate risks is to operate in local markets and keep expenses and revenue in your local currency. However, not a viable choice for many businesses.
While exchange rate risks cannot be avoided all together, there are steps that business owners can take to hedge against fluctuations. Firstly, awareness is key. Understanding the mid-market or interbank rate, which is the fairest rate you can get, will provide a benchmark to compare rates between banks and money transfer services before making a transaction.
Using a trusted money transfer comparison site can help you get the best value for your dollar and avoid being overcharged. Hedging methods like forward-exchange deals can also lock in the cost of goods, so the amount payable isn’t affected by exchange rate fluctuations.
Business owners could also diversify their operations so they aren’t overly reliant on foreign goods or services, or at least keep transactions in widely used currencies. Running any business is challenging. While the unpredictable nature of exchange rates can be daunting, awareness and preparation is critical to managing the impact on the business.
Alon Rajic is the Founder and Managing Director of Money Transfer Comparison, a global comparison website helping Australian businesses and individuals find the best rate in international money transfers to and from Australia.