International CurrencyInternational Currency

What is currency risk?

Every business owner has heard of the big business bets that paid off. We continue to be compelled by the stories of the entrepreneurs who are risking it all to create the next Uber or Canva.

While some risks are worth taking, and worth talking about, businesses often have underlying risks that, if not addressed, can have serious impact on the bottom line.

Small things can make a big difference, and while it may not be as exciting as making the ‘big bet’ that could grow your business exponentially, having an understanding of the currency risks your business faces can help provide certainty, so you can focus on the bigger things.

What is foreign exchange risk?

Do you deal with international customers or suppliers? If you do, you have probably felt the pain of a moving market, resulting in something being more expensive than you’d planned for. This is currency, or foreign exchange, risk.

Buying goods or services overseas creates an inherent foreign exchange risk, based on the price of the currency you are buying or selling when you make the transaction. 

    Exporters

    If your business exports goods or services, currency movements could mean that you receive less of your local currency than originally intended on the date you issued an invoice to your customer.

    Importers

    If you’re an importer with post-paid arrangements with your suppliers, changes to currency rates could mean paying more for goods than you planned to sell them for.

You may feel this risk is out of your control, but it doesn’t have to be. You can help create more certainty by knowing what your foreign currency risk is and when it is likely to work for or against you.

Foreign currency risk isn’t always bad for your business

As with any type of risk, there is an upside and a downside to consider. For businesses, currency risk could mean a few things:

Risk chain reaction 

The bottom line is that if you leave your foreign exchange to chance, you have no control over whether you will be facing an upside or a downside. If you buy goods or services overseas every month then the risk is multiplied because of the number of transactions you make.

Know your FX needs

Whether you use foreign exchange services for your business as a one-off or regularly, you should consider how to make these transactions work better for you. Knowing what your minimum profit margin is can help you understand, and then plan for, the worst exchange rate you can afford to accept for any transaction. Then you can aim for an exchange rate for your transaction above this.

    Let’s say you are a business in Australia, and you need to buy parts from the US for US$100,000. This transaction on January 1, 2020, when the Australian dollar was worth US$0.7024, would have cost A$142,369.02. But the same transaction on March 23, 2020, when the US dollar had strengthened to US$0.5789, would have cost A$172,741.41 – an extra A$30,372.39.

* The cost comparison is based on a single transfer of USD$100k to AUD using the Market Rate for demonstration purposes only. Customer transfers use OFX’s Customer Rate and this combined with other factors such as different currency exchange amounts, currency types, dates and times will result in different actual costs.

Between January and March 2020 COVID-19 hit, creating huge swings in currency markets. Whether big or small, exchange rate shifts are never out of the question, and even smaller swings can still seriously dent a business’s profit margin.

If you could protect against currency risk, would you?

Businesses don’t need to leave their currency risk to chance. Foreign exchange specialists, like OFX, have products designed to help businesses use currency risk to their advantage and help create more certainty.

You wouldn’t trust a GP with a specialist surgery. So, rather than dealing with a bank, speak to currency specialists. As well as offering typically lower fees and rates, OFX can also help you develop a strategy to help protect your profit margins and create more cash flow certainty, allowing you to focus on growing your business.

IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.

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