In today’s global market businesses need to keep a close eye on foreign exchange (FX) rates, in order to manage FX impact or risk losing a lot of money.
In commerce, it’s tempting to think of the price of goods as the one thing you can rely on to stay under your control. Of course, prices can change – suppliers’ costs may rise and market competitiveness might fluctuate. But largely, it is within a producer’s power to set the price and know what to expect in return once goods exchange hands.
Unless that is, you want to sell goods internationally, which in today’s digitally-driven cross-border marketplace, most do. From the biggest multinational to a kitchen-table crafter, everyone has access to international markets. But this does add an extra layer of complexity and we’re not just talking postage costs.
When goods and services are transferred across borders, they are at the mercy of exchange rates. For a holidaymaker, fluctuations in the rate means a slightly more expensive (or cheaper, hooray!) beer. But for businesses trading thousands and even millions of pounds-worth of goods, a change of even a few pence on the pound can snowball into a massive dent in profits.
Since the global financial crash in 2008 and the low interest rates that followed, exchange rates have been relatively stable and large currency fluctuations have been rare. However, they can happen, and these fluctuations can have an even more devastating impact on revenues. In August 2018, the Turkish Lira suffered huge falls making it very cheap currency to use. Chinese travel company, Ctrip, announced it would ban the use of Lira to buy holidays. It turned out that customers had been paying using the Turkish currency but almost immediately cancelling, demanding refunds in the stronger Chinese Yuan.
This is an example of crafty individual consumers getting wise to a brief but advantageous blip in the market. But there’s nothing to stop it happening at corporate level and the results could be disastrous, wiping out profits and even leaving sellers unable to cover their costs.
Trading cross-border at scale requires an understanding of how the foreign exchange market works to make the most of your base and secondary rates. There’s an excellent primer on how to understand and manage FX and your business here.
But for many organizations, managing their FX exposure is at best time-consuming and expensive. At worst, it’s time-consuming, expensive and confusing, which can lead to costly mistakes. A blog here explains the process you need to go through if you deal with your FX transactions directly. As more and more services spring up to manage different aspects of businesses finance needs – expense management, reconciliation – FX is no different and outsourcing has real advantages.
Using an API-based service to manage FX, companies are able to access real-time rates for currencies, manage their FX exposure and then pass on this knowledge to their customers so that they can pick the right time to ‘cash out’ to their native currency.
All this combined makes a great deal of sense for companies when it comes to any dealings with foreign currencies and therefore makes it a lot simpler and less expensive for them to operate globally.