The fluctuation of the Canadian dollar against the US dollar represents a significant risk for all small business owners operating in the United States. Here are some strategies to reduce this risk. For exporters, a devaluation of the Canadian dollar is good news. For companies that import many products from the United States, however, it’s the very opposite. In any case, the exchange rate must remain a constant concern.
In this guide on currency exchange for small businesses, we at Interchange Financial analyze what currency exchange is, how it works and how your very own company can save money when managing your international money transfers.
What in the world is currency exchange?
The exchange of currency or forex is the process of exchanging one currency for another. The two currencies that are being liquidated are a currency pair, with the exchange rate being the value of the second currency over the first.
For example, if you have pounds but need euros, the currency you are interested in is pound/euro. Currency pairs are usually represented in coded form, and the codes usually consist of three letters that represent the currency itself and the country from which it originated.
The currency code for the pound is GBP – GB for the United Kingdom as well as P for pounds. The currency code for the euro is EUR, which applies to both the eurozone and even the euro.
For a currency pair, the currency is the base currency and the currency is the quoted currency. The pair’s exchange rate indicates the amount of the quoted currency it receives for one unit of the base currency.
The following are the 10 strategies of foreign exchange for small businesses:
Number#1. Accounts In Foreign Currency
A foreign currency account can be an ideal solution for companies that have many transactions in a particular currency. Providing cash in this currency can help companies respond faster as well as reduce currency risk. It as well lessens the need for manifold cross-currency transfers out there.
Number#2. Do You Have A Plan For Your Business?
It is important to take into account the needs of your business and plan accordingly. Find a partner who can help you identify your cross-border payment requirements and set your actions accordingly, this will bring a lot of benefits for you and your company
Number#3. You Want To Use Cash Payments
When making cash payment you buy or sell currencies at the very current exchange rate out there. Spot rates are suggested for less significant payments, which are less standard or perhaps while the currency necessitates being changed quickly. Look for sellers with low rates and competitive differentials between the purchase and sale prices.
Number#4. You Can Choose The Currency Option
The currency options establish an exchange rate at a certain date in a certain amount. However, you are not required to exercise an option. If maybe the foreign exchange rate truly moves in your own favor, you can give up the option as well as use the cash exchange rate. You will pay a premium using this very flexibility, however, it’s worth considering the currency options if the demand is not 100 percent secure or should the purchasing factors are to some extent unknown.
Number#5. You Want To Cover Yourself With A Futures Contract
In fact, this type of contract is a contract in which a specific amount of currency is purchased on a specific value date in the future at a specific exchange rate for settlement. These are ideal for protection against fluctuations and for the budget. By pre-pricing, small businesses can easily plan and know exactly what their costs will be.
The coverage also includes opening a currency to a broker that pays the interest overnight and a change of the same currency to the broker that does not charge interest. That way you can maximize your profits, but the hardest part is finding a broker that does not charge interest. In addition, coverage requires a lot of investment.
Number#6. Use Online Transfers To Facilitate Cash Management
Online transfers facilitate cash management as well as increase the visibility of payments. This makes the invoicing of invoices with foreign suppliers also cheaper: Western Union Business Solutions (WUBS) offers an online FX platform that allows entrepreneurs to manage global online payments at any time.
Number#7. Use A Budget Tool That Provides Visibility Of Overexposed Items
A few providers actually offer you budgeting products, which robotically calculate the general currency risk for numerous invoices. It implies companies can go to a single platform to see how much their cross-border cash inflows and outflows are worth in their local currency based on the present market, so they can actually make great informed decisions.
Number#8. Billing Of Invoices With Foreign Suppliers In Local Currency
Foreign sellers often fill invoices to reduce foreign exchange risk. Surveys from Western Union Business Solutions (WUBS) show that one in five Chinese suppliers increases invoices in USD by 4 percent to cover fluctuations in the exchange rate. When doing business with foreign suppliers through their local currency, business owners have the opportunity to negotiate a refund.
Number#9. Buy A Limit Order For Your Business
Limit orders work by buying currency while the price reaches a predetermined goal. This is more effective for companies with some flexibility of time before they have to make payments, a limit order can be purchased through an account manager who buys the currency once the target price is reached.
Number#10. Compare Costs And Sales
One of the main sources of exchange rate risk is that costs and revenues are generated in different currencies. One way to reduce this risk is to change your business practices so that the difference no longer exists, in most cases, companies cannot completely eliminate risk.
The goal is simply a better balance, so you can make a profit by moving currencies in one area to offset the losses in another. This strategy can be very effective and is conceptually easier to understand when compared to some financial strategies out there.
Finally, build your plan, implement it and then forget it. Find out what is a good position for your business, once you have established a rate that is good for you; it is still good for you if the rate goes down. Just keep in mind that your very own business has actually been derisked through the above strategies and then focus on running your business.