How To Protect Your Business From Currency Risks When Trading Internationally

My previous post explored the benefits of exporting for small businesses. This time I am looking at the potential pitfalls of dealing with international currencies and how to guard your company from them as best you can.

Dealing with another currency can be pretty nerve-wracking as currencies fluctuate, and can suddenly be affected by all kinds of seemingly unrelated events. The FSB report that 'A total of 48 per cent [of small businesses] are put off by fluctuating exchange rates...'

Generally speaking though, while rates don't remain static day-to-day, the rate of change is usually quite gradual. You can try to mitigate this risk by following some of these tips:

1. Study the country you are looking to trade with to try and identify any patterns. If you see a certain country fluctuates within a year by 7 percent against your domestic rate, you can add an extra 7 percent to the cost of your product when you trade with that country. This ensures that you will get your default price if the currency drops by 7 percent, and if the currency drops less than that, stays the same or increases, you will achieve more profit. (Manifest's customisable price lists are a great way to assign different prices to products when trading internationally.)

2. You can set up a forward exchange contract. This is where you make an agreement with your trading partner to exchange currencies on a specific date in the future, using a specific exchange rate.

3. Demand short payment terms with overseas customers to lessen the risk of noticeable fluctuations in the exchange rate.

4. If a forward exchange contract isn't viable, and you have an ongoing, medium/long-term trading relationship with a non-domestic supplier, it might make sense to bank some of your money in their currency to protect yourself from any future problems.

5. There is an increased risk for businesses that are buying in a currency with a relatively high valuation and selling to weaker currencies. In this scenario, any significant fluctuation will have a direct impact on profit margins. To mitigate this risk, the business should try to balance the currencies in which it is buying and selling. So, try to match your sales in euros to your spend in euros; this results in costs that are in direct proportion to the retail price and protects profit margins.

6. Take advantage of specialist transfer services that often pass on better rates. Try TransferWise or FXCompared.

In the next article, we will be looking at how to tackle the red tape that holds so many businesses back.

photo credit: Stock Photography - Canadian Coins