This issue for British firms highlights the challenge of cross-border transactions, where usually one side or the other must shoulder the risks and responsibilities of foreign currency exposure.
Using an accounting firm and its client as a case study, we look at three ways in which a balance be struck to the benefit of both parties. Let us assume that the UK advisor is billing its European (euro-denominated) client in sterling.
Using currency brokers
Savings of some 90% of the transaction cost (typically reducing margins from up to 5% to about 0.5%) can be achieved by settling payments through a large variety of reliable and reputable brokers. These brokers offer superior exchange rates and substantially lower fees than typical high street banks, as well as often faster settlement. Money transfer comparison websites make it easy to choose from a vetted range of currency brokers, based on price and service.
In our base case, this is a direct benefit to the client, who is effectively reducing the hard cost of the transaction quite substantially. Cumulatively this amounts to about a one month discount for every two years of client service - a material saving.
Using future payments
Assuming that the bulk of accounting work is predetermined, either at a fixed price or within a reasonably predictable range, the client could reduce exposure to currency fluctuations by taking a forward option to lock in a fixed future price for the exchange, thus being able to account on a more stable basis for the cost.
Alternatively, the client can set just a floor or ceiling price (these are called limit orders and stop-losses), so that the transaction is within an acceptable range. Again, currency brokers can provide these services at an affordable price, with detailed reporting to help account for the transaction.
Billing in local currency
It may also be advantageous for the UK business to assume the currency position by billing in Euros, as this could attract European clients by reducing the cost and risk of taking service from a GBP-denominated provider. The UK practice would use the same methods as previously mentioned to move funds back to sterling and set a fixed price or a range for the value of the currency, and/or could choose to hold Euros in-country and offset some of their own exposure by being able to cover any local outgoings in the local currency.
International payroll specialists can assist in setting up and running such operations, and indeed with all of the tools and strategies explained here, sophisticated online reporting can be provided by currency specialists to help track and react to foreign exchange movements.
In summary, there are substantial benefits to UK firms considering currency exposure for their non-UK clients. Clients may save significant costs and reduce their exposure to volatility, and even further grow an international presence for the practice.
You can find more detailed guides on some of the key international payments issues elsewhere on the economia International Payments hub, including how to raise margins by improving your foreign currency invoicing, how to manage your currency risk and future currency payments and how to save money and manage currency risk in your business.
If you would like to find out more about how we can help on your international payroll improvements, please call us at FXcompared on +44 (0)207 871 5565 or email us at firstname.lastname@example.org.