ECONOMICS: Ten foreign exchange strategies for small businesses

Ten foreign exchange strategies for small businesses

KINA LINDROS

Contributed to The Globe and Mail

Published Friday, Mar. 21 2014, 5:00 AM EDT

Last updated Thursday, Mar. 20 2014, 11:18 AM EDT

According to Statistics Canada, small businesses contribute more than half of the country’s GDP, and although they represent less than 1 per cent of the total number of exporting firms in Canada, they generate 17 per cent of overall exports.

Managing cash flow can be a particular challenge for companies doing business overseas with currency fluctuations between the time a deal is made and when payment is complete exposing businesses to uncertainty and profit margins to risk. Using the right combination of payment and cash management strategies means small businesses can improve their cash flow and protect profits.

1. Have a plan. It’s important to look at your business needs and build a plan accordingly. Find a partner that can help you determine what your cross-border payment needs are, both incoming and outgoing, and set your actions accordingly.Here are 10 top tips for small businesses looking to manage their funds and be more competitive:

2. Foreign currency accounts. A foreign currency account can be an ideal solution for businesses that have many transactions in any particular currency. Having cash ready in that currency can help companies react more quickly and reduce currency risk. It also reduces the need for multiple cross-currency transfers.

3. Spot payments. Using a spot payment means buying or selling currency at the current exchange rate. Spot rates are recommended for smaller payments that are less regular, or when currency needs to be exchanged rapidly. Look for providers with low fees and competitive spreads between buy and sell rates.

4. Hedge with a forward contract. A forward contract is a contract where a set amount of currency is bought for settlement at a determined value date in the future, at a predetermined exchange rate. These are ideal for protecting against fluctuations and are useful for budgeting. By fixing prices in advance, small businesses can easily budget and plan knowing exactly what their costs will be.

5. Currency option. Like a forward contract, currency options set an exchange rate by a certain date at a certain amount. However, you are under no obligation to exercise an option (hence the name). If the exchange rate moves in your favor, you can forego the option and take the spot rate instead. You pay a premium for this flexibility but currency options are worth considering when demand isn’t 100 per cent certain, or if purchasing parameters are partially unknown.

6. Use online transfers. They provide easier cash management and increases payment visibility. It also makes settling invoices with overseas vendors more cost effective. Western Union Business Solutions offers an Online FX platform so business owners can manage global business payments online at any time.

7. Use a budgeting tool that gives visibility over exposures. Some providers offer budgeting products that automatically calculate total currency exposures for multiple invoices. This means businesses can go to a single platform to see how much their cross-border incoming and outgoing cash flows are worth in their home currency based on the current market so they can make more informed decisions.

8. Purchase a limit order. Limit orders work by purchasing a currency when the rate hits a predetermined target. It’s most effective for businesses with some time flexibility before they need to make payments. A limit order can be purchased through an account manager, who will buy the currency once the target rate is hit.

9. Settling invoices with overseas vendors in local currency.Overseas vendors often pad invoices in order to mitigate against currency risk. Research from Western Union Business Solutions shows that one in five Chinese suppliers adds roughly 3-4 per cent to USD invoices to cover foreign exchange fluctuations. Making deals with overseas vendors using their local currency gives business owners the opportunity to negotiate a discount.

10. Build your plan, implement it, then forget about it. Work out what a good position is for your business, implement your plan, and then forget about it. Don’t waste any more time worrying about where exchange rates go. Once you have determined a rate that’s good for you, it will still be good for you if the rate moves further down the line. Rest easy knowing your business has been de-risked and focus on running your company.

Kina Lindros is the global head of online trading at Western Union Business Solutions. She has over 15 years’ experience in international payment strategies, including roles as president and CEO of Travelex Global Business Payments, North America and vice president of trading.

INTERNATIONAL TRADE: Canada is Bucking Global FDI Trends (Foreign Direct Investments)

Canada Bucking Global FDI Trend

Peter G. Hall, Export Development Canada

World political leaders still have an axe to grind with business. Corporations are still sitting on a vast cash-stash, and don't seem to me in a hurry to invest. The same is true of cross-border investments. From a low level in 2012, they are eking out very modest growth thus far in 2013. Will business hesitation hold back the world economy indefinitely, or is there hope that things will turn around?

Global foreign direct investment (FDI) plunged by a stunning 33 per cent in 2009 as the world tumbled into the Great Recession. However, by 2011 solid growth lifted FDI up to a level just 9 per cent below the 2008 level. Something spooked investors in 2012, though, shoving FDI back down by 18 per cent. In the first half of 2013, FDI is up, but by a slim 3.8 per cent. Seems like we have waited a long time for a resurgence, only to get a relapse. Is it temporary, or are we in trouble?

So far this year, weakness is widespread. Collectively, emerging markets are growing 8.8 per cent, but take away the impressive gains in Russia and Mexico, and total FDI is actually contracting by 5.5 per cent across a broad swath of markets. Together, developed-market FDI is down 12 per cent in the first half of the year, with few gainers. Five years beyond the crisis-point, the figures aren't comforting.

Is there a good explanation for current performance? Discouragement could be a factor - after all, five years is a long time to wait for true recovery. Yet business confidence numbers argue against gloom. Could it be the nascent slowdown in emerging markets? Perhaps, but that doesn't explain either the isolated aggressive gains or the developed-market losses. Is it the multiple, potentially havoc-wreaking global risks that followed the recession? Maybe, but they have recently moderated.

Maybe it's China's fault. After all, its labour markets are tightening, dissuading companies scanning the globe for sources of abundant, inexpensive workers. But if so, we would see evidence of that investment going elsewhere, and to date, that's not obvious in the numbers. Moreover, FDI to China actually posted a reasonable gain in the January-June period. Could it be access to credit? Possibly, but if companies really want to invest, they have the cash. So far, none of these typical factors that stymie investment makes a compelling case for sluggish FDI performance.

Truth be told, the hesitation in current FDI is likely more normal than not. Businesses typically invest when they are convinced that they have to in order to process the inflow of orders. When they have spare capacity - as they did in spades following the recession - they hold back until they've used it up. They thought that was the case in 2010 and 2011, when massive stimulus created the illusion of a recovery - but that faded fast, leading to today's tepid FDI activity. They will invest again - but only when an upsurge of activity compels them to. Until then, we'll have to be content with what we get.

Fortunately, Canada is one of the few that is bucking the global trend. Thus far in 2013, FDI inflows are up 44 per cent, and the recent $36 billion Petronas announcement, together with interest from other sources, bodes well for future growth. Canada's rich resources, solid economic structure and economic prospects will likely remain an effective magnet for future foreign investment.

The bottom line? UNCTAD's mid-year checkup of foreign investment flows is uninspiring - but thankfully, those flows aren't an economic bellwether. As global activity picks up, so too will investment flows. Widespread aging of the population suggests that FDI will play an even greater role in the next economic cycle, as international sourcing of labour is added to the list of reasons to do it.

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