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.