Ignore the currency markets at your own risk

This article was originally published on August 22, 2017 on the WorldFirst blog.

Note: This is part two of our three-part series on helping global SMBs overcome the “Bank Gap” to find better ways to manage their foreign currency risks and payments. See part one here.

Why should you have a currency exposure plan? If you do business globally, failing to anticipate and adapt to the constantly moving foreign exchange markets could cost you thousands — or even millions — in potentially avoidable losses.

Just ask Toyota. Despite seeing a 7% rise in global sales last quarter, Japan’s largest automaker suffered ¥35 billion in operating losses (that’s roughly $320 million) from currency fluctuations alone.

With that kind of profit-crushing danger potential, it’s little wonder why “we want more support for currency exchange” was a top response from 500 surveyed small- to mid-sized businesses (SMBs) when asked how financial institutions could help support their international business expansion. (This is one example of “The Bank Gap,” where traditional banks have come up short in helping SMBs grow internationally.)

How can you protect your bottom line from currency fluctuation disaster? In helping thousands of SMBs with cross-border payments and currency risk management since 2004, we’ve found that the best way to reduce foreign currency risk is to create a currency exposure plan.

But before we get to that, it’s a good idea to first learn how currency markets can affect your business.

The fundamentals of exchange rates for your global business

If you do business outside the US, your revenues and profits are impacted every time the dollar strengthens or weakens. And that happens a lot — in fact, currency markets (also called foreign exchange markets) often change by the second with each economic report, central bank action, or Brexit-magnitude event that emerges.

Fortunately, there’s a simple way to look at markets as it relates to your business (assuming you’re US-based).

Generally, the more the US dollar strengthens against other foreign currencies, the more foreign goods and services you can buy with your dollars (i.e. the less expensive your import costs). On the flipside, a stronger dollar can hurt your sales from foreign countries, as the overseas revenue you generate will translate into fewer US dollars when you repatriate.

What if it’s the other way around? If the US dollar weakens against other currencies, your dollars will not stretch as far and won’t buy as much overseas (i.e. your imports and other foreign costs increase). The good news with a weakening dollar is that your sales in foreign countries could be magnified, as the stronger overseas currencies will translate into more US dollars when you bring that money home.

What’s happened to the US dollar compared to other major currencies this year?

With markets always on the move, a lot can happen to the value of your dollars (and your revenue and profits by extension) over the course of even just a few months. To give you an idea, here’s a look at how much the world’s most popular currencies changed in value compared to the US dollar since the start of this year:

Foreign currency Cost in USD
January 2, 2017
Cost in USD
Mid-August 2017
Change YTD
1 Euro $1.05 $1.18 11.3%
1 British Pound $1.23 $1.30   5.1%
1 Canadian Dollar $0.74 $0.79   5.5%
1 Japanese Yen $0.0086 $0.0092   6.6%

*Table: Mid-August figures are from 8/12/17, and are interbank rates

As you can see, these four major currencies have all strengthened against the dollar this year by a not-so-small amount — all of which impacts your buying power in other countries. For example, at the start of the year one euro cost $1.05 in US dollars. In mid-August 2017, the euro strengthened 11% compared to the dollar, and cost a more expensive $1.18.

Why is it so important to pay attention to currency changes like these?

Let’s say I had an Italian shoe store here in the US and chose to ignore the currency markets. At the beginning of the year, I could import 100,000 euros worth of shoes from my Italian supplier for $105,000. Today, if I made the exact same €100,000 shoe order from my Italian supplier, I would have to pay the equivalent of $118,000 because of negative changes in the US dollar’s value.

That’s an added $13,000 (or 11% more) in unexpected import costs that I would either have to a.) take out of my profits, or b.) pass on to customers in the form of higher prices — not a choice I want to make!

Given those options, you can see why it’s a good idea to at least pay attention to the markets, and preferably use foreign exchange tools — such as a forward contract — that can help reduce the risk of currency losses and protect your business’ bottom line.

Here’s What You Can Do

For those who don’t fancy looking at currency pairs, here’s the takeaway: foreign currency markets can change quickly, and not having a currency strategy in place could put your business’ financial success at the mercy of the markets.

The good news is, you have the power to take back control. Next time in our series finale, we’ll show you several currency tools your business can use to navigate currency markets, control your import costs, seize cost-saving rate opportunities, and help protect your bottom line from currency risk.

Need a plan now? Our experienced team can get to know your global business and work out a currency strategy that gives you the control and flexibility you need to protect your revenues and profits. Get the conversation started by calling 737.209.4024, or click to see how we can help boost your bottom line.