Small businesses seeking to grow their bottom lines often have to look for opportunities beyond their immediate markets. Many small businesses looking for growth often forge strategic alliances for international exposure. Some small businesses find suppliers in foreign markets in order to create a competitive advantage. Other small businesses hire professionals in foreign countries or market their products and services to buyers in other countries.
Interestingly, when it is time to create financial accounts, many business owners with international exposure are surprised that their top and bottom lines are not impressive. A small business with foreign exposure can still lose money despite the fact that they have excellent products, sold at decent margins, and with good marketing strategy in place.
One of the biggest factors that exert downward pressure on the profits of businesses with international exposure is the seemingly harmless and often overlooked currency risks associated with volatile currency exchange rates. This piece provides insight into how a small business can best handle foreign currency risks.
Use spot rates
The basic, simplest, and least stressful way to manage foreign exchange transactions is to use spot payments. A spot payment is probably what you already do if you buy or sell foreign currency at the current exchange rate. If your international business dealings are occasional or involving small transactions, spot payments are probably the best solution because you’ll be able to spend less time thinking about how to get the best rates, you just enter the forex markets, do your transaction, and head back to managing the core competencies of your business.
The downside of doing spot forex payments is that the greedy human nature will cause you to agonize every time you make a forex transaction and you find the market moving significantly. You’ll start wondering if you could have gotten better deal if you had waited a week to conduct the transaction. However, you might be better off with spot rates if the current exchange rates won’t threaten your profit margin.
Find a dedicated foreign exchange management service
If you make regular foreign currency transactions or if you buy/sell significant volumes of foreign transactions, using spot forex payments will most likely cause you to lose money in the long run. Businesses with a significant forex exposure should consider the use of forward contracts, online transfers, forex accounts, currency options or limit orders among others to manage their foreign exchange exposure.
Unfortunately, many small business owners do not have the expertise to use forex hedging and derivative instruments; yet, you can’t afford to leave your forex transactions to chance. You can take advantage of professional services for SMEs that need the input of experts on how to manage their foreign currency exposures.
For instance, currency forward contracts can be used to “lock in” an exchange rate against a future foreign currency payment. Locking in the rate mans that you get to buy/sell foreign currency at a predetermined time irrespective of the prevailing market rate when you actually want to make the transaction.
Getting professional foreign exchange management also ensures that you get low fees and competitive spreads between your foreign currency buy and sell rates. If you choose to self-service your foreign exchange needs, you are not likely to get fair rates in the retail forex markets because you are just one insignificant buyer/seller in the grand scheme of things. Foreign exchange management services however can pool together the buy/sell orders of many businesses for a numerical strength to negotiate better rates.