Taking your business online means you get to deal with international customers. If you’ve never done this before, you’ll soon notice a problem: currency exchange rates fluctuate all the time, and this can impact how much you make from a sale. To avoid being at the total mercy of Foreign Exchange (Forex) rates, here are the options you need to understand:

 

How do Forex rates affect my business?

There are four ways in which Forex rates can affect your business. These are:

  • Transaction exposure
  • Translation exposure
  • Economic risk
  • Transaction costs

 

Transaction exposure is the danger of the large currency movements, between the date of purchase / sale and the actual time of the transaction. For example: Say a customer places an order from your business in Singapore. The order is for USD$10,000 worth of product, and the purchase order is signed on 8th March (of any year). The customer has 30 days to pay. On 8th March, the exchange rate is USD$1 = SGD$1.4, so the expected amount from this transaction is SGD $14,000. Two weeks later, on 22nd March, the US dollar devalues. The exchange rate falls to USD$1 = SGD$1.2. The amount from the transaction then becomes SGD$12,000, leading to a loss of SGD$2,000. Assuming you expected a profit margin of SGD$2,000 from the sale, the change in currency rates would mean you sold the product at cost price. In extreme cases, transaction exposure can even lead to selling products at a loss.

 

Translation exposure is a worry to listed companies, which list of any of their assets or liabilities in a foreign currency. As the exchange rate shifts, this will affect the company’s balance sheet. For example, say you have a loan of £7,000 from a bank in the United Kingdom, where you have recently started to do business. If the exchange rate is £1 = SGD$1.74, then your debt is SGD$12,180. But if the exchange rate suddenly spikes to £1 =SGD$1.97, your company’s debt would become SGD$13,790. (Accountants typically mark such changes as being Forex related, in the financial statements).

 

  1. Economic risk

This is a “big picture” issue, in which you need to consider whether it’s worth doing business in another country given long term exchange rate issues. For example, you might be thinking of setting up a factory in Thailand, because the current cost is lower than in Singapore. But what if the exchange rate between the Thai baht and Singapore dollar become unfavourable? At that point, would you have sunk too much into the factory in Thailand, to easily relocate? For long term initiatives (e.g. you plan to set up and operate the factory in Thailand for 10 years), you need to consider whether the exchange rate will remain favourable. Besides this, you need to consider that the strength of the Singapore dollar can also cause you to lose sales, if it gets too high. If the strength of the Singapore dollar climbs, your business exports become less competitive (price wise) that counterparts in, say, China or Vietnam. This will cause prospective customers to leave and buy elsewhere. You will need to consult a Forex broker or a related expert, for a business outlook.

 

  1. Transaction costs

There is almost always a cost, when either party needs to exchange one currency for another. This can come as an administration fee from the bank, or the spread charged by a Forex broker.

Note that, even if you don’t suffer transaction costs yourself, your clients do and this can affect your business. For example, say someone from China wants to order something off your website. This customer’s Visa or MasterCard will impose a Forex charge for the purchase. Sometimes this causes you to lose the sale, as some customers will look for alternatives.

 

What can I do about Forex rates?

There are services provided by banks and financial institutions, which can reduce (but never totally remove) the impact of Forex rates on your business. Besides that, there are strategies you can use yourself:

  • Have a multi-currency account
  • Use various specialised tools for hedging
  • Factor exchange rates into the cost
  • Aim for speedy transactions

 

  1. Use a multi-currency account

Most corporate bank accounts have a multi-currency option. If yours doesn’t have one, make sure to get it before doing business abroad. A multi-currency account means you can hold different currencies at once. For example, the account could hold SGD$27,000, £6,200, and USD$11,000 all at the same time. If you have a single currency account, you need to covert the currency immediately to put it in your bank. This can cause losses, if you’re forced to covert at a time when rates are not favourable. In addition, a multi-currency account lowers transaction costs. For example, if there’s a fee for converting SGD to USD, you won’t have to pay it if your bank account already has US dollars. There’s no conversion process.

 

  1. Use various specialised tools for hedging

Banks and financial institutions offer specialised tools for dealing with Forex rates. One example is a forward contract, in which you can buy a currency at a predetermined price, at a specific date. For example, you can buy a currency forward to purchase US dollars at SGD$1.4 to USD$1, at any point next year. This allows you to “lock in” a given rate. You can also buy Options, which give you the right (but not the obligation) to buy a currency at a given rate, at some point in the future. Options can also be sold, which provides flexibility. Speak to your bank for a list of options.

 

  1. Factor exchange rates into the cost

This is the most straightforward option: raise the price for overseas buyers, to accommodate for currency fluctuations. Of course, this results in other concerns, such as whether your pricing policy will drive away customers.

 

  1. Aim for speedy transactions

The best way to avoid Forex losses is to make your transactions fast. If you give an overseas buyer up to 90 days to pay, for example, you’re exposing yourself to significant risk; a lot can happen to the exchange rate in that time. Likewise, you may not want to delay too long, if you need to make an overseas purchase. A shift in the exchange rate can mean your payment to suppliers suddenly skyrockets. Sometimes it’s best to buy now, when you know you can get an acceptable price. As a rule of thumb, try to get transactions processed within the month, whenever currency conversions are needed.

 

For everything else, come talk to us for help

As if Forex issues weren’t enough, you’ll also need to deal with inventory, shipping schedules, and some way to deal with orders coming in 24/7. Going online gives you access to an international market, but it brings new challenges as well. For all these other issues, speak to one of our expert consultants at Synagie.com. We’ll help you handle the time-consuming details, so you can focus on more important business goals.

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Olive is the Co-founder and Managing Director of highly scalable Synagie.com. Olive is a total geek and loves all things technology, and is an awesome mumpreneur to two lovely baby girls. Olive's mission is to help brands get into the online commerce space and has achieved to date, close to 200 brands and counting!

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