11 May 2015 05:15pm

How to raise margins by improving your foreign currency invoicing

Many businesses need to make or receive payments from customers or clients in other countries. This often leads to mismatched currency revenues and costs - caused primarily by exposure to foreign exchange markets. This mismatch can lead to higher administrative costs and adversely impact profit margins. Correctly managing your foreign currency invoicing can help reduce currency risk and eliminate extra costs, while also preventing the potential loss of overseas customers.

When a company with international operations invoices its customer in the company’s domestic currency, rather than the customer’s home currency, they force the customer to absorb currency risk and conversion costs. By offering the customer the opportunity to pay in their home currency, a company has the opportunity to potentially increase its margins by the level of the exchange rate costs of the customer.

There are also situations where suppliers use their foreign invoices to show a worse exchange rate that they actually bear (for example the difference between a poor headline bank rate and a very competitive currency broker rate). By moving the invoices to the same currency, this margin can be eliminated.

Foreign Currency Invoicing Case Study

Case study one:

Issue: Foreign Supplier invoicing your company in Pounds

Business Goal: Increase margins (lower costs) by having the supplier invoice in their home currency and not Pounds

HomeretailAZ.co.uk, a UK website operating in pounds, buys all its furniture from Furnico in Italy, where the furniture is priced in Euros.

Furnico has always invoiced homeretailAZ.co.uk in Pounds, even though its products are priced in Euros (€). On the invoices, Furnico shows a Euro to Pound rate of 1.4.

On the latest invoice for €1.4m, Furnico sent homeretailAZ.com an invoice for £1m citing an exchange rate of 1.4 Euros to Pounds. The 1.4 rate is the rate Furnico says its bank charges, but Furnico actually has access to a currency broker providing it a rate of 1.43. Therefore when Furnico receives the £1m, it would actually pocket €1,430,000 - €30,000 more than its price tag.

HomeretailAZ.co.uk then requested Furnico to resend the invoice in Euros. HomeretailAZ.co.uk worked with a specialist currency broker to settle this €1.4m invoice in Euros at the rate of 1.43 costing it only £979,021, a saving of £20,079. After this saving, HomeretailAZ.com requested Furnico to send all future invoices in Euros.


Case Study two:
Issue: Invoicing globally from one location

Business Goal: Manage and reduce currency risk, keep administrative costs low, increase visibility of cash flow and payments

A global treasury operation based in the UK with customers spanning the globe needed a way to consolidate their invoicing and payments operation into one central location, invoice customers in the local currency, and receive payments back in the treasury’s home currency. By working with a global invoicing service, the treasury was able to set up their systems so that all customer invoices were generated from one location (the company’s headquarters in the UK), while customers were able to pay their invoice into a local subsidiary bank account.
At the close of each business day, all customer payments are uploaded into the global treasury’s main account in the UK. All receipts and payments made from local affiliate banks can be seen and accounted for in this system, providing increased visibility into all payment and funds activity.
The treasury operation has access to an online system that provides crucial information on movements in the foreign exchange markets, as well as currency exchange specialists who are available 24 hours a day to help with customized hedging solutions to help reduce exposure to foreign exchange currency volatility.

Benefits of Foreign Currency Invoicing

Foreign currency invoicing provides benefits to businesses and to international customers alike:

  • Improved customer experience: Companies that need to invoice overseas customers are able to send and receive money in one currency, while still invoicing in the customer’s local currency, reducing the customer’s currency exposure and risk, and keeping business costs low.
  • Convenience: Foreign currency invoicing gives companies a safe, cost-effective, and convenient way to make international transactions. Many foreign currency brokers offer online services, as well as over the phone, and will provide 24 hour access to the company’s account to monitor payments and funds received.
  • Low fees: While there are some invoicing service providers who charge for foreign currency invoicing, many provide these services free of charge, or else charge a minimal fee if the amount of money being sent is below a certain threshold. Forex currency specialists also offer better foreign exchange rates than the typical bank.
  • Risk management tools and services: Many foreign currency invoicing providers give their customers a variety of online tools to help them manage their foreign currency risk and their exposure to currency markets. These services often include foreign exchange rate monitoring, access to live forex reports, currency converter tools, economic forecasts, access to dedicated foreign currency exchange specialists, and systems that can automate and track your company’s invoicing needs.

Foreign Currency Invoicing Risks and Issues

Foreign exchange markets can be volatile, and when making international transactions, businesses are always exposed to some currency risk. Companies invoicing to global locations may choose to reduce their own exposure to currency risk by invoicing customers in the company’s domestic currency. When going this route, companies run the risk of alienating customers who must absorb exchange rate risk on their end.

Conversely, if the company decides to invoice in the customer’s local currency, they then run the risk of exposing the company to this foreign exchange risk. Implementing a foreign currency invoicing system that allows the company to accept and receive payments in the currency of their choice, while invoicing in the customer’s currency, can help to mitigate both currency risk and conversion costs.

Finding the right foreign invoicing service provider to match your needs is an important consideration. The larger and more widespread the company’s operations, the more important it is to find a service provider who can match your currency exchange and global invoicing needs. It is also important to find a currency invoice provider who offers safe, secure, and technologically advanced solutions that will allow your company to send invoices, as well as send and receive funds across the globe safely and legally.

Jonathan Hyman is Chief Economist at  FXcompared Intelligence, the research arm of FXcompared, the leading independent resource for International Payments solutions