Businesses that operate in foreign markets and multiple currencies can be seriously affected by shifts in exchange rates. Which is why if you’re trading overseas, it’s vitally important to understand how conversion rates work, how they affect your business and how to make FX (Foreign Exchange) work in your favour.
How exchange rates work
At its simplest, an exchange rate is how much one currency is worth compared to another currency. This can vary hugely over time depending on many economic, social and political factors.
Most FX rates are determined by the foreign exchange market, also known as forex. These rates fluctuate on a daily basis. Having a strong currency is better if you’re buying or sending money, as you can buy more of the weaker currency. This is why it’s so important for businesses selling in foreign markets to keep an eye on exchange rates – as it can seriously affect your profit margin.
The key figure to look at is the interbank (or mid-market) rate. This is the rate banks use when exchanging currencies between themselves. This is a much better rate than the buy or sell rate offered to customers which includes a number of percentage points so the bank can make a profit on the transaction. The range between the buy and sell rates is known as the spread and this can vary hugely depending on the financial service provider you use. The bigger the spread, the more it costs your company to do business in that market. That’s why it’s vital to have a business account with a financial services provider that offers a low spread and the best rates when it comes to FX.
Typically, high street banks will have the widest spread and may also charge additional fees on international transfers. With payment platforms like KoalaPays, not only will you pay less for currency conversions, you’ll also be able to hold each currency in a separate account, exchanging at a time when you feel the rate is best.
Currency risk and your business
Fluctuating exchange rates can affect your sales forecasts, the price of the goods you sell, profit margins and your competitiveness in regional markets. That’s why, it’s vital you keep an eye on exchange rates and dynamically fine-tune your business strategy to react to changes in exchange rates. Of course, it’s equally important to keep another eye on the fees you pay for receiving and exchanging payments in foreign currencies and the control your bank gives you over how you carry out foreign transactions.
The most dramatic effect FX rates can have on your business is when you need to pay an overseas supplier, or when an overseas customer pays you. As exchange rates can move significantly over the course of just a week. It also varies based on how much you need to pay a supplier in your own currency, or the value of payment from a customer.
Let’s say that you need to pay an overseas supplier on a certain date. If, between now and then, the value of their currency rises, as a consequence, it will cost more of your own currency to make the payment. Likewise, the value of the currency you take from an overseas customer can fall or rise depending on the exchange rate on the day the customer makes the payment.
Making currency exchange work for your business
For these reasons, it’s vital to get the best possible deal on your FX conversions and any fees associated with them. Being able to hold money in different foreign currencies within your bank account can be a huge advantage, as you have more control over when the currency exchange transaction takes place. And the more control you have over currency exchange and your account, the more you can offset currency risk.
With the right tools and good FX management, you can even use currency to your advantage. Unfortunately, that’s not something offered by most traditional banks. But there are many new online banking platforms out there that are more flexible when it comes to currency. KoalaPays account, for example, comes with a range of advanced currency trading tools (and excellent FX rates) that can help the smallest business maximise profits and reduce costs.
As more businesses trade in overseas markets, there can be big rewards by integrating an informed currency strategy into your business model. And if you need advice, Koalapays is here to help.