While many may assume that operating a small to medium sized business means that you will mainly be dealing with local and regional customers and suppliers, the ease of buying and selling on the Internet means that this is no longer the case.
In order to survive a highly competitive marketplace and challenging economic times, businesses of all sizes are increasingly looking to foreign markets all across the globe for supplies and finished products. Consumers, too, are frequently turning to businesses all over the world for unique, well-made handcrafted goods such as jewellery, and purchasing from them directly through the Internet.
Companies such as Paypal, Etsy, Western Union, and even traditional banking institutions, are all making it easier to conduct business on an international scale by providing simple, convenient ways to make and receive payments in a wide variety of currencies, as well as providing instant currency exchange services for a small fee.
Negative Impacts of Currency Fluctuations and Currency Conversion
While the fees are often small, usually cents per dollar on a transaction, the fee to make conversions between currencies, as well as fluctuations in the actual rate of exchange between currencies, all add up to an increase in a company’s cost of doing business and eat into their profit.
While large corporations carry this loss as the cost of doing business and make up for it based on the volume of their total sales, many small to medium sized businesses that buy and sell internationally cannot afford to stay in business if they do not take steps to minimise their exposure to this risk.
Currency fluctuations between the Australian Dollar (AUD) and other currencies, such as the US Dollar (USD), commonly occur whether you are buying raw materials or a finished product. The fluctuations in currency that occur between the time that the sale is made, and the product delivered and paid for, can negatively impact any company’s cash flow, amount of sales revenue as well as their balance sheet values.
Negative impacts to the balance sheet values include the unplanned production of misleading financial statements and also an increased potential for violation of debt covenants with lenders and investors. Since the potential for a negative impact to your balance sheet is great, it is important to take steps to reduce your risk.
Reducing Risk from Currency Fluctuations and Conversions
There are a few ways to reduce your company’s risk from currency fluctuations. These methods include:
Asking your supplier to provide the quote in Australian dollars, thereby allowing them to carry the risk.
Purchasing forward cover insurance to protect your transactions from currency fluctuations.
Add an amount to your margins to cover you for variations in the rates.
For more information talk to your bank or your accountant. You might also find this download from the Bank of Queensland very useful.