Foreign exchange, also known as forex or FX, is a key consideration for both costs and revenues in a business. Whenever one currency is exchanged for another, you’re exposed to risk, and should therefore think carefully about your payment strategies. While you can never entirely eliminate the currency risk, it’s important to understand how foreign exchange works and what steps you can take to protect your profits and trade as economically as possible.
Below are a few instances of how Forex can come in handy when you are trying to keep your SME afloat, and some important things that you should remember.
Pricing the products and services you sell abroad in U.S. dollars
If you take this approach, you might be limiting sales without knowing it. Just as Americans are hesitant to use a foreign currency, a foreign customer may be hesitant to use U.S. dollars. Customers who feel inconvenienced by paying in U.S. dollars rather than their local currency may look elsewhere.
The fluctuation between the dollar and the local currency may also result in pricing that is either too high or too low for the market. By pricing your products in the local currency, you can avoid these outcomes and possibly increase sales and profits.
Forex / Exchange rates are never static
Currencies are traded in pairs in the global forex marketplace, and their values vary according to market forces. The relative value of a currency pair will fluctuate from day to day, which means that international businesses must keep a close eye on exchange rate ups and downs. For example, if you’re a Sri Lanka-based business that either sells in Europe or deals with European suppliers, your currency pair for international payments will be Rupee/Euro (or LKR/EUR). As with all currencies, the exchange rate is not static.
One day it may be in your favour, meaning the rupee has gained against the Euro, but the next day it may work against you so you receive fewer Rupees in exchange for Euros. To stay abreast of exchange rate fluctuations, you should use a rate alert service that will let you know when rates are looking good for your business. Many companies provide this service, which usually involves receiving an email or text message when your currency pair reaches your desired rate.
Invoicing in U.S. dollars for the products and services you buy from foreign companies
In this scenario, you might be paying more than you should. Some suppliers “pad” (increasing the rate value) the exchange rate when determining the U.S. price equivalent. You may ultimately pay less if you are invoiced in your customers’ local currency and work with your bank to exchange it into U.S. dollars.
Forex or Foreign currency accounts can be helpful
If your business regularly sends and receives payments in a particular foreign currency, you could be saving money with a foreign currency account. While it’s possible to send and receive payments in foreign currency without one, such an account could help you save on the exchange rate. If you’re paid in a foreign currency and deposit it to your account, you can later use it to make a payment to a foreign seller. By holding it in the account instead of exchanging it to U.S. dollars and back to the currency, you don’t have to pay to exchange it.
As we navigate increasingly turbulent waters at present, understanding how Forex works and how it can impact your business is critical. Therefore, remember to always read up, research and stay updated on Forex trends.
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