Currency concerns needn’t be a leap into the unknown

Every time I meet anyone from UK Trade and Investment, their sincerely delivered mantra is that, if Britain is to grow, we all need to export. I have no doubt they are absolutely right, but the first small steps into overseas markets can feel like giant leaps for mankind when you own a young or growing business.

In fact, even starting to buy from overseas suppliers can be a daunting experience, but getting the basics right starts with a one step at a time approach and the enlisting of expertise in crucial areas.

One of the most significant changes in doing cross border business is that, suddenly, you have an exchange rate to contend with. That can seem a hassle, a burden, or yet another complication but it really doesn’t need to be any of these things.

Most definitely, you will need to make some changes to your accounting procedures but accountants are trained to handle multi-currency book keeping and balance sheets so that is nowhere near as complicated as you might think. Use an expert to manage it and the problem goes away.

What you will need to do is think about how you will handle the actual conversion of your funds into or out from the foreign currency and that too can seem another leap into the unknown. Unsurprisingly, faced with something so new and unfamiliar, many companies opt to abdicate the responsibility and just get their high street bank to make the currency conversions for them. Almost invariably that is a costly error.

I suggest that high street banks are not the best source for your foreign exchange because your needs differ from the tourist looking to change £200 into Euros to go on holiday. A bureau de change desk in a local bank is as good a place as any to get that money exchanged. However, when you have to send tens of thousands of Pounds to an overseas supplier or you are receiving funds from overseas against your invoices, there are some considerations which are not well catered for by the local foreign exchange desk.

People looking to exchange currency should think beyond their banks and shop around for the best deal. Expert FX brokers have the edge because they monitor exchange rates around the clock and have specialist knowledge of the market to ensure customers trade at the right time and get the most for their money.

Good currency management starts with thoughtful planning. You wouldn’t set out to trade with overseas companies without some kind of business plan, a budget, a forecast so, because the exchange rate will play an integral part in your project’s profitability, you need to have a plan for that as well. Ask your high street bank for a forecast over the next year and you will most likely be met with a blank face or, at the other extreme, you will be subscribed to a heavyweight market orientated report. If your eyes don’t glaze over before the third paragraph, I will eat my hat.

A good specialist broker is geared up to help you make those plans and lay currency forecasts into your cash flow projections to make sure you are not doing a lot of extra work just to lose money.

The next step is to deal with the practicalities of receiving or making currency payments. A broker can take your Sterling and pay the currency of your choice to an overseas supplier or receive currency against your invoices before turning those funds into Sterling and crediting your bank account. If that doesn’t suit, you will need bank accounts in the correct currencies. That does carry some minor expense, but it may afford you the flexibility you need to better manage your cash flow.

The booking of your exchange rates will offer further flexibility. Specialist brokers should offer better facilities to help you manage risk and get the most out of the exchange rate volatility.

If you have to make an immediate payment, a ‘Spot Contract’ does just the job. You agree an exchange rate with your broker, set a settlement date a few days ahead and you exchange funds with the broker on that date.

If you have more time on your hands, you may wish to take advantage of the volatility in the foreign exchange markets through the use of automated orders which target currently unobtainable exchange rates. These orders can be triggered if the exchange rate you have specified is available anywhere in the world at any time within the 24 hour trading day.

If you are totally risk averse you may wish to cover all your currency requirements on what are known as ‘Forward Contracts’. These allow you to agree an exchange rate today but delay the exchange of funds until a date up to two years ahead. These are particularly attractive when you are costing inbound goods for sale but perhaps have a 60 day payment window. Your exchange rate is fixed so your profit margin is assured.

Forward contracts are also very popular when a currency payment is due to be received in 60 days’ time. Being able to set the exchange rate back to Sterling up front means you can accurately budget for income on your cash flow projections.

These are just a few tools available for importers and exporters to use but the best currency management plans generally involve a combination of all of the above plus some other factors. Ultimately, taking a bit of time to research your needs, assess the facilities available and formulate a plan will pay dividends in the long run. Your plan is likely to evolve as your business grows and, far from being a hassle and an inconvenience, if you handle them well, your currency transactions can actually enhance the bottom line.