How to Manage the Foreign Exchange Needs of your Business
For most businesses, our highly globalised economy means needing to make transactions in multiple currencies is a daily occurrence.
This most commonly takes place when purchasing or selling goods abroad. When businesses import goods from other countries, they need to pay for those goods in the exporting country's currency.
Likewise, when they export goods, they receive payment in the destination country's currency. This requires the firm to exchange its domestic currency for foreign currency to make or receive international payments.
Businesses may also have foreign exchange requirements linked to foreign investment, overseas expansion, or sourcing raw materials from other countries.
However, the currency market being in constant flux can add an extra dimension to managing a business's cash flow and budget.
The impact currency volatility can have on your business
Volatility in the currency market can significantly impact a business's profit margins and budgets. Fluctuations in exchange rates can directly affect a business's revenue and expenses, particularly for companies with large international operations or foreign partners.
For businesses importing goods or services, a sudden increase in the value of the domestic currency can make these cheaper. On the other hand, a sudden drop in the value of the domestic currency can cause the cost of importing to rise, reducing profit margins. A sharp drop in a currency can also fuel domestic inflation, which can further increase the cost of other inputs and reduce purchasing power.
Unexpected movements in the currency market can make it difficult to forecast revenue and plan for future expenses, leading to increased uncertainty and risk. A business that operates internationally or has foreign investments may budget its expenses in a foreign currency, but they have to convert those expenses back into its domestic currency. If exchange rates fluctuate, their expenses can vary significantly from their budgeted amounts, making it difficult to plan for and manage expenses effectively.
Moreover, currency volatility can impact a business's ability to raise capital or borrow money. If a business is seen as operating in a country with high currency risk, lenders may be less willing to provide financing, or they may require higher interest rates to compensate for the increased risk.
How volatile has the currency market been in recent months?
Suggestions that 2023 would bring some stability to the currency market following a turbulent end to 2022 have so far proven to have been a little wide of the mark. Movement in the currency market through the first quarter of 2023 has remained highly volatile.
Recession fears, fluctuating central bank interest rate expectations and developments in Ukraine have all resulted in some notable swings in the Pound, Euro and US Dollar. One particularly notable source of volatility was the turmoil in Europe's banking sector in March. Contagion fears following a collapse in the shares of Swiss banking giant Credit Suisse saw the Euro fluctuate as much as 1% a day at the height of the crisis.
Even when there are only a few cents of movement, this can have a significant impact depending on the size of the transfer.
For example, a UK manufacturing firm purchasing raw materials from Europe might have agreed to pay €100,000 to import timber in December. When the sales contract was agreed upon, the GBP/EUR exchange rate was €1.16, so the €100,000 transfer would equal £85,200.
However, three months later, when the firm came to settle the invoice, the GBP/EUR exchange rate had fallen to just €1.12. Meaning the same transfer would cost almost £89,300, leaving a £4,100 hole in the firm's budget.
What steps can businesses take to limit their exposure to currency volatility?
There are several steps a business can take to limit its exposure to currency market volatility. The first of which is to stay abreast of the latest developments in the currency market. Businesses which keep up to date with the latest news will be better positioned to time their transfers for when the market is most favourable to them.
However, this isn't a foolproof strategy as movement in the currency market can sometimes be highly unpredictable.
Working with a reputable currency broker like TorFX allows businesses to take more proactive steps to safeguard against currency volatility while boosting profit margins.
Businesses could see immediate savings through making their transfers with TorFX as they will avoid the transfer fees often imposed by banks. In addition, TorFX's highly competitive exchange rates can help businesses make even more savings.
Every business is different, so TorFX also offers a range of currency transfer services that can be adapted to suit your company's needs and help you protect your profit.
What services does TorFX offer?
In addition to helping you secure a great exchange rate, TorFX offers a range of extra transfer options that can help a business minimise its exposure to currency volatility while also maximising the potential returns on any international transfers. Some of these services include:
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Spot Transfers - are ideal for when a business needs to move money quickly. TorFX will seek to secure you the most competitive exchange rate available and then immediately transfer your funds.
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Forward Contracts - allow an exchange rate to be fixed for up to two years, offering businesses greater certainty when budgeting. While locking in a rate in this way would mean you'd miss out if the exchange rate strengthened, your future transfer would be protected from negative market movements.
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Market Orders - are useful when businesses are targeting a specific exchange rate. Limit Orders allow you to target an exchange rate above the prevailing rate, which will be executed automatically when your chosen rate is struck. With a Stop Loss Order you can hold out for a more favourable rate while protecting against sudden drops.
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Rate Alerts - can be set up by businesses to help keep an eye on the currency market. You will be alerted by email and SMS the instant your target rate is met.
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TorFX can also help you best time your currency transfers by keeping you updated with all the latest currency movements with Daily Market Insights.
All this can be accessed 24/7 through an online platform or through speaking to a dedicated Account Manager, who will provide support and guidance to help you get the most out of your transfers.
Currency market volatility can be a real headache for businesses of all sizes. Unfavourable movement can easily see profit margins squeezed and budgets missed.
If your business does not have a foreign exchange strategy in place, your bottom line may be at risk.
Taking steps to minimise your exposure to currency market volatility is vital to ensure cashflow remains consistent and protected from forces outside your control.