12 May 2015 04:26pm

Seven ways to save money and manage currency risk in your business

Whether importing, exporting, transferring funds to a foreign office, or managing international payrolls, currency fluctuations can present a major risk to a company's profit. Failure to manage these risks can add significant costs that can adversely affect margins. Get it right, though, and the savings - both in money and time - can be significant

1. Immediate (spot) international payments

Challenge: Getting the best deal for a typical foreign currency transfer.

Solution: Spot contracts are based on the prevailing market exchange rate. According to our research, companies - and individuals - can save/gain up to 4% of the transfer value by using a specialist currency broker instead of their bank. These currency brokers offer more favourable exchange rates and typically do not charge fees or commission.

2. Future international payments (income or expenditure)

Challenge: Given global currency fluctuations, exchange rate risk grows if transfers or payments are to be made in the future. Whether buying products or services over the coming year or expecting income from overseas, exchange rate volatility makes budgeting harder and can threaten margins.

Solution: Exchange rates can be fixed, reducing or even eliminating volatility risk and saving money. There are three different types of products:

  • When the timing of transfers is not important the maximum and minimum exchange rates can be set using a limit order and a stop-loss. These two products together can set a predictable range of exchange.
  • If the date of a future transfer is known, the exchange rates of this transfer can be set in advance using a forward contract. The downside of a forward is that you do not benefit if the exchange rate improves.
  • A third alternative is an option. An option gives the right - but not obligation - to buy/sell currency by a later date at an agreed rate. Not only is the rate known in advance, you can still benefit if the exchange rate moves in your favour. Options cost money, however, whether or not the option is exercised.

These three products are best discussed in detail with a currency broker as they will be tailored to a specific business needs.

3. Foreign invoices

Challenge: Foreign exchange exposure can exist through mismatched currency revenues and costs. In addition, invoicing in sterling may not be competitive or desired by your customers.

Solution: Foreign currency invoicing is a particularly effective way of reducing currency risk, but many companies, especially if they have no foreign currency costs to offset, invariably invoice international customers in sterling. Invoicing in a customer’s currency has many advantages even for businesses which have no costs and accounts in those currencies.

Billing in sterling forces overseas customers to absorb currency risk and conversion costs, potentially deterring customers or squeezing margins, especially when entering new markets. Brokers enable companies to receive or pay funds in one currency whilst invoicing in another. This can protect the company against administrative costs and poor exchange rates.

4. International payroll

Challenge: Managing international payrolls can be costly and time-consuming, especially if revenues are not generated in each location.

Solution: Many providers offer international payroll solutions. These simplify the process and reduce the cost of paying multiple beneficiaries in multiple currencies without the need to maintain lots of foreign currency accounts or an administrative presence. With a specialist international payroll service, employees paid in local currency can receive more money, or companies can reduce the cost in domestic currency of salaries denominated in local currencies. Such payment platforms can be integrated into the major payroll and accounting packages.

5. Selling through online marketplaces/e-tailing

Challenge: Making the most of sales via international online marketplaces, high transaction costs when selling internationally on online marketplaces, and long-time time lags to receive payments.

Solution: Current methods of managing and converting foreign currency receipts can be very expensive, costing up to 4% of turnover. Specialist services for e-commerce/e-tailing operations can reduce these costs considerably, whereby overseas local currency accounts can be created to receive foreign currency payments. Funds can then be transferred back to the home currency account at a better rate than can be offered by the marketplace and within hours versus weeks.

6. Mass payout - making hundreds or thousands of international payments

Challenge: Managing the cost of large numbers of cross-border payments in multiple currencies and sometimes for very small individual amounts.

Solution: Tailored mass payout solutions can significantly reduce the cost and improve the efficiency of making lots of (often small) instant payments to recipients in multiple countries and currencies. Single unified interfaces allow businesses to initiate, track, and reconcile payments no matter the location, payment method, or currency of the recipients.

Mass payout solutions can also work for companies with an international workforce or international freelancers directly on their books, and for companies paying commissions internationally to sales people or distributors. Payments can be made in variety of ways such as bank transfers, prepaid cards, e-wallets, or cheques.

7. Managing overseas and travel expenses

Challenge: Managing overseas staff and travel expenses in multiple currencies.

Solution: Pre-loaded currency cards, many of which can hold multiple currencies, can significantly reduce the cost and administrative burden of travel expenses through setting spending limits, locking in exchange rates in advance, and obviating the need to reimburse staff. Currency cards not only offer better exchange rates than will be available for cash travel money, but also, unlike most regular credit or debit cards, incur no transaction fees abroad, whether used to make payments or withdraw cash. They are also much safer than carrying cash, and any losses arising from misuse are capped. Furthermore, more prepaid cards can be issued to employees than can corporate credit cards, and it is much simpler to do so.

Over the months ahead, FXcompared Intelligence will be adding further guides to the Economia International Payments hub covering the topics above and others in more detail.

Daniel Webber is the co-founder and managing director of FXcompared, the leading independent resource for international payments solutions