Whether your business sells or sources products from other countries, remember this: your financial success is largely beholden to the whims of the currency markets and how you react to them.
Your revenues and profit margins are impacted every time the dollar strengthens or weakens compared to other currencies. For example, a strengthening dollar means you can buy more foreign goods, making your import costs less expensive. On the flipside, a stronger dollar can hurt your overseas sales – as the revenue you generate from other countries translates into fewer dollars when you repatriate.
As you might imagine, some business owners think it’s a daunting task to navigate the currency markets — which change by the second with each economic report or Brexit-magnitude event. But there’s good news: just because you can’t control the markets doesn’t mean you can’t protect (or grow) your bottom line.
Here are some foreign exchange tools to help you better control import costs, minimize foreign exchange risk, and maximize your overseas profit potential.
1. Forward contracts can help you control import costs.
Want more certainty from your import costs? A forward contract lets you lock in today’s exchange rates for up to three years, so you know what you’ll be paying for your bills and supplies in dollar terms in the future.
For example, let’s say I need to order €100,000 worth of Italian shoes to sell at my shoe store in the US. If today’s exchange rate is $1.05 per euro, it will cost me $105,000 to order the shoes right now. If the euro strengthens to $1.10 over the next quarter, it will cost me $110,000 for the same order of shoes – or $5,000 more than it did before. That’s either $5,000 I have to take out of my profits to keep my shoe prices the same or $5,000 I have to add into my shoe prices – not a choice I want to make!
But if I were to use a forward contract to lock in the exchange rate at $1.05 per euro, I could keep my import costs at a predictable $105,000 per shoe order for a fixed period of time – from six months up to three years. That gives me much more certainty when crafting budgets and setting prices.
Bottom line: Forward contracts are great if you’re looking to budget. Fair warning though, if the exchange rates move in your favor during the lifetime of the contract, in this example to 1.03, you’re still bound to the contract rate of 1.05. So in the event the rates move in your favor, you might end up paying more than if you left it in the hands of the spot market.
2. Spot contracts let you seize cost-saving opportunities.
Know a good buying opportunity when you see one? The spot contract lets you make an overseas payment “on the spot” (i.e. almost instantly) so you can strike when the iron’s hot.
Returning to my earlier example, let’s say I order €100,000 worth of Italian shoes from my supplier, who will require payment in 90 days. I could either a.) use a spot contract now to buy the shoes for $105,000 if the exchange rate is $1.05 per euro, or b.) take a chance and wait if I think the euro could be cheaper in the future. For example, if I think the euro could lose value over the next 90 days if populism and uncertainty takes hold in Europe, I may wait until the exchange rate falls to $1.00 per euro before I pay the bill on the spot – which would save me $5,000 (almost 5%) on my shoe order.
Of course, if I chose to wait and the euro gains in value, I could end up paying more for my shoe order. But the point here is that spot orders give me more freedom to take risks to potentially cut my import costs.
3. Rate alerts and firm orders help you grab cost-saving exchange rates, automatically.
Know the exchange rate you want to pay but don’t have time to watch the markets? Use an international payment company’s rate alert service or firm order to find that ideal rate and help you grab a cost-saving opportunity.
For example, if euros cost $1.05 each, but I want to wait until they’re trading at $1.00 before I send a payment to my shoe supplier, a rate alert service could notify me when euros fall to that rate so I can grab my cost-saving opportunity. If I use a “firm order,” I could have an international payment company book the order for me as soon as the exchange rates fall to $1.00 per euro, so I can get the best deal possible on my imports.
Building an effective currency strategy for your business
Whether you use any one of these tools or a combination of them to pay suppliers or bills overseas, it’s important to have the right currency strategy in place so you feel in control.
Our experienced team can take the time to understand your business, and work out a plan that gives you the control, confidence, and flexibility you need. Get in touch with us at 737.209.4024 to get the conversation started or click to see how we can help boost your bottom line.
This article was originally featured on the World First USA blog.