If you are considering international expansion for your business, you’re likely to face a few risks that all revolve around one thing: foreign currency. Dealing with foreign currency can be rather confounding for the uninformed, but there are many ways to manage the risks that accompany it. Here, Galvin International examines the risks of foreign currency and provides strategies for dealing with them.
Understanding the Risks – The Basics
When you trade overseas, it is likely that your business will be paid in the local foreign currency. For instance, a UK business selling to a German customer will probably be paid in Euros rather than in British Pounds Sterling.
However, being paid in a foreign currency presents a problem if that currency falls in value before you are paid. This means that the amount will be worth less to you when the cash arrives. If you have a small profit margin, this fluctuation could even wipe out your entire profit on the deal.
To determine the size of the risk foreign currency poses for your business, you’ll need to consider two factors. The first is the length of the period you’ll have to wait before you’re paid. If you must wait a long time before the payment is made, there’s a higher chance the currency values will change—possibly for the worse. The second factor to consider is the size of your profit margins. If your business model relies on a high volume of sales with low profit margins, then it takes only a small currency change to make a large dent in your profits.
Managing the Risks – The Solutions
Even if you find that foreign currency risks could be a problem for your company, there are a number of solutions to help you manage these risks. Many of these solutions are simple to implement, and involve no extra cost. Consider whether any of the following solutions could work for your company.
One way to completely avoid the risks of foreign currency is charge international customers in your own local currency. This method actually means that your customer covers the risks, and is worth bringing up in negotiations, particularly for large deals that have a major impact on your bottom line.
Another tactic, also involving negotiation, sees you increasing your prices if the currency rate falls. Talk to your customer about including a clause in your sales contract to leave room for foreign currency fluctuations.
You can also consider deliberately switching some of your costs into the same foreign currency in which you’re being paid, or even relocate some of your business operations overseas. For example, a UK business being paid in Euros could also pay for a portion of their expenses in Euros. Thus, if the Euro falls in value, the UK business has protection.
If these options are not suitable for your business, you can manage risks by buying foreign currency tools, as well. This type of management comes with a different set of risks, so learning about the details of these foreign currency tools is crucial.
To learn more about paying to manage currency risk, or to discuss other aspects of foreign currency risk management, contact Galvin International. Our team of expansion experts will provide you with all the resources you need to keep your business compliant as you pursue global growth.