This week the pound plummeted to a 35-year low amid market chaos and growing concerns about the UK Government’s response to the Coronavirus. First posted in May 2015, our blog on cross-border trading is pertinent now more than ever to businesses who operate globally:
International trade opens up new markets but also brings currency risks to your business.
The first choice faced by any company considering international trading is whether to invoice in its own or the client’s currency. The instinctive choice is to opt for your own currency but this can be unattractive to customers. Opting for the customer’s currency can appear risky and you might be tempted to load a high forex factor on top of your prices in order to protect your business.
This is something to consider carefully, high forex factors can be up to 10% on top of the usual price. Loading the price with a high forex factor increases the risk of currency and market loss, depending on market behaviour. As a seller your fixed prices will have numerous fixed margins and forex will be a key one when selling across borders.
Be aware that a high forex factor can result in pricing that is not competitive and can lead to a loss of business.
Internally this can impact upon the sales targets and performance measures within your business, and have unintended outcomes both for the company as a whole and individual salespeople. Furthermore if not fully understood it can also create profit and loss accounting which has no real meaning.
While challenging selling abroad can be successfully managed by owning the forex risk. Before you begin to trade across borders you should implement proper systems and processes.
You must do due diligence and determine the true risk appetite of your company, the intended product and the market. To manage the forex risk your company needs a rounded strategy that protects against risk and also allows upside opportunity.
Once in place your strategy needs to be fully understood and implemented at every level. It is important that the strategy is widely understood in order to enable thorough reporting on trading.
Sharon Constancon, CEO of Valufin has provided in sourced forex treasury management for small, medium and larger private enterprises since 1988. Sharon says of creating a thorough strategy– “this can be done by creating a hedging strategy that is time flexible and allows for changes in rates and the business without creating related risk.”
Once trading is under way you will rely on quality reporting. You don’t need complicated products for reporting but it’s essential to have good communication. Having information at your fingertips will enable you to respond and manage forex risks.
Over the decades that Valufin has been in business Sharon Constancon has managed forex risk for global companies the earnings have been between 2% and 5% of forex turnover without taking any undue risks.”
Whether you’re taking the first steps to trading across borders or would simply like more support Valufin offer forex services on a needs only basis. Their experienced staff work alongside clients who cannot warrant the cost of an experienced treasury manager but want to be more informed and in control. Valufin can support your international currency activities with the expertise to successfully trade internationally.