Dealing with multiple currencies is an unavoidable reality for any growing business with customers or suppliers overseas. But exchange rates are constantly shifting, driven by political events, market volatility, and economic shifts – often in ways that make them seem out of your control. While these fluctuations may feel like just another cost of doing global business, ignoring the risks could lead to lost profits and financial uncertainty.
Whether you’re converting marketplace earnings or paying suppliers, exchange rate changes can have a significant impact on your bottom line. For small businesses and startups, even tiny fluctuations can erode profit margins and complicate cash flow management. So, how can you stay in control?
What is currency exposure?
Currency exposure refers to the financial risk businesses face when transacting in several currencies. When the value of one currency shifts relative to another, it impacts the cost of payments or the value of earnings. For instance, if your business earns revenue in USD but operates in GBP, a weakening dollar could reduce the value of your earnings when converted. Similarly, paying suppliers in a foreign currency when exchange rates rise can increase your costs unexpectedly.
The risks of currency exposure
Imagine a 2% shift in foreign exchange rate adding $1,000 extra on a $50,000 supplier invoice or reducing your €10,000 earnings by €200. These fluctuations both impact your profits and complicate forecasting and budgeting.
The ripple effects can be seen across your business. If you try and absorb the extra costs, your profit margins shrink, making it harder to reinvest in growth. On the other hand, passing the cost on to your customers can make your products uncompetitive, potentially pricing you out of the market.
Not having certainty around how much you’ll earn or pay makes it challenging to predict your cash flow and plan strategically. For businesses that operate on tight margins, these risks can spiral into operational challenges.
How to manage currency exposure
While you can’t control currency rate movements, you can manage their impact on your business with practical tools and strategies. Here are some key approaches to reduce risks:
Use a multi-currency account
A multi-currency account is a practical way to manage currency exposure. It lets you hold funds in different currencies so you don’t have to convert immediately. Instead, you can wait for a more favourable exchange rate or even pay suppliers in the same currency that you receive from customers, avoiding costly double conversions.
For example, if you sell in USD and you need to pay suppliers in the same currency, a multi-currency account allows you to bypass conversion entirely, avoiding unnecessary fees. This can simplify cash flow management and retain your profit margins.
Set rate alerts or target exchange rates
Some multi-currency accounts, like the World Account from WorldFirst, include tools to help you monitor and act on exchange rate changes. You can set rate alerts to be notified when a favourable rate is available or target an exchange rate for automatic currency conversion. This ensures you don’t have to be watching the market constantly but can focus on running your business.
Lock in rates with a forward contract
For businesses planning future payments, forward contracts can provide peace of mind. A forward contract lets you lock in an exchange rate for a transaction due in the future. It’s particularly useful if you’re concerned about your home currency losing value. If you know you’ll need to pay a supplier in a few months, locking in an exchange rate can shield you from unexpected rate changes.
Diversify your risk
Spreading your exposure across different currencies and markets can help protect your business from sudden shifts. By holding funds in multiple currencies, you’re less reliant on immediate conversions when rates aren’t in your favour. Expanding into different markets also softens the blow if one region slows down – stronger performance elsewhere can help balance the impact on your bottom line.
Take control of your global finances
Managing currency exposure doesn’t need to be overwhelming. With tools like multi-currency accounts, rate alerts and forward contracts, businesses can minimise risks and optimise their global transactions. However, you do need to be proactive in protecting your profits by taking the steps to plan for market fluctuations and choosing the right solutions for your business.
Want to learn more about managing currency exposure? Get in touch with WorldFirst to explore solutions tailored to your business needs.
*The information provided in this article is for general informational purposes only and does not constitute financial or professional advice.