Senior Smart Currency Consultant, Si Cong Ma, writes about the vital role currency exchange plays when expanding your business internationally.
Trading overseas can be a lucrative way to diversify your market share and grow your business. Businesses that are trading abroad or planning to do so need to understand the crucial role that currency exchange plays in international business expansion.
Often overlooked, currency exchange has a crucial part to play in international expansion. If you are thinking about selling your business, it is important to show that the business is capable of minimising currency costs and mitigating the risks involved in such transactions. Being able to do so successfully can increase your profitability, making your business a more lucrative proposition for potential buyers.
Why Are Currency Costs Crucial to Your Bottom Line? Technology has improved our lives tremendously and continues to do so. Although this means that businesses looking to exchange currency can immediately tap into live rates, currency markets can move blink of an eye, potentially resulting in significant profit losses. Take, for example, Spanish retailer Inditex – owner of high-street brands like Zara and Massimo Dutti – whose sales rose by 5.6% in the second quarter of this year. Despite the rise in sales, the company’s profits were significantly threatened by unfavourable currency costs.
Why Is This Crucial for Saleability? Having a robust currency strategy will not only ensure that you are aligning with your end goal of maximising the value and saleability of your business, it also strengthens your business model, assisting in achieving the set targets needed for an exit strategy. Given that an exit plan is often required for funding applications, this will help to make your business more attractive when you apply for funding. Losses in currency costs do not only affect your profits, they also represent funds that could be spent on other aspects of running the business, which could potentially be used to grow the business and contribute to the company’s value and saleability.
How to De-risk Your Currency Exchange Exposure Businesses require tailor-made currency strategies in order to help them save money and mitigate risks on currency exchange. Strategies can vary depending on your circumstances, but here are two popular strategies for minimising currency costs:
1) Spot Businesses that cannot plan their international payments in advance often opt to exchange currency ‘on the spot’. Buying on the spot can mean that they are subject to unfavourable exchange rates.
2) Forward Businesses that can plan their currency purchases in advance can opt for a ‘forward’ hedge. This allows them to lock in current rates when they are favourable, to be used at a later date, when live rates may be unfavourable. This helps to mitigate the risks presented by volatile currency markets. Although currency exchange is a niche part of accounting, it plays a crucial part in a business’s bottom line, as well as in its value and saleability. Businesses that are trading abroad need to use strategies that fit them best in order to save money and reduce risks on trading in foreign currency.
Si Cong Ma is a senior consultant at Smart Currency whose work with his clients involves understanding all aspects of running their business, in order to better recognize their exposure to currency market volatility. Si is instrumental in helping his clients develop strategies that help them to reduce losses, mitigate risks and grow their profits.