How concerned are you about incurring business losses due to foreign exchange movements?
Every international trade transaction represents a currency exchange risk to either the exporter or importer and this has been more apparent than ever with the recent strengthening of the euro and weakening of the US Dollar, each of which represents a benefit or challenge depending on which side of the fence you happen to be sitting.
Whilst many UK exporters consider that the most effective strategy to eliminate this risk is to invoice in pounds sterling, this approach merely transfers the foreign exchange risk to the overseas customer. A buyer based in Europe will generally prefer to pay in euros, whilst many other territories prefer to trade in the US Dollar. Such a policy therefore could result in the British exporter losing potential sales to competitors who will happily invoice in the buyer's preferred currency.
On the other hand, UK based Importers should consider the potential cost of paying overseas suppliers in pounds sterling. It may well be that the supplier is significantly increasing the cost of the goods or services to account for potential adverse exchange rate moves.
Offering to invoice or pay in the currency of your overseas trading partner can therefore provide a strong competitive or cost advantage, however it must be remembered that trading in a foreign currency carries a significant financial risk. It is therefore vital that a company considers an active policy for managing exchange rate moves.
By way of illustration, a UK company has purchased a large item of machinery from Germany payable in Euros. The total value was EUR 500,000 and was payable in two equal stage payments as follows:
Stage 1: August 2007 - EUR 250000 converted at a rate of 1.4795 = GBP 168976
Stage 2: February 2008 - EUR 250000 converted at a rate of 1.3205 = GBP 189322
The strengthening of the euro against sterling between the first and second stage payment has resulted in our importer paying £20346 more in February than in August against the same euro denominated value.
There are many providers in the marketplace prepared to discuss foreign exchange management strategies with both exporting and importing businesses. The question is: who is the best and most competitive?
Most businesses have a strong relationship with their bank and rely on them providing quality support and advice in all aspects of their business, including international trade and foreign exchange transactions. Increasingly though, there are other specialist FX and payment providers who are very happy to provide this highly lucrative business independently and it may be that for some companies, the direct access to a dealing room or internet based foreign exchange and payments may prove more cost effective and attractive.
The key is to be open to ideas and not to bury your head in the sand when it comes to transacting in a foreign currency.
Your provider should be prepared to discuss with you:
• How to invoice / pay - which currency?
• How to protect against adverse exchange rate moves
• Use of currency accounts to match payments and receivables in currency
• How to take advantage of favourable exchange rate moves
You should also regularly assess how much you are paying in bank charges, particularly in respect of overseas supplier payments. Also do compare FX rates from time to time, to ensure that your current provider is giving you a fair price in a very competitive market.
Mark Hayward
MJ Hayward Associates Ltd
Tel: 0800 043 4052
www.mjhayward.co.uk
"Helping you to Grow your Business through International Trade"