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Cut the cost of your international invoices (Why your currency exposure is a blessing in disguise)

business-articlesCut the cost of your international invoices (Why your currency exposure is a blessing in disguise)
The nature of overseas trade means that someone has to shoulder the burden of currency volatility. If you’re invoicing your customers in your own currency, then they’re the ones with the burden.

Currency fluctuation means that while your income remains stable – on the face of it, at least – their costs can change dramatically month-on-month. If you can solve this problem by invoicing clients in their domestic currency, doing business with you becomes a lot simpler and a more attractive deal.

You might wonder why you would want to take on currency exposure from your suppliers having explained the drawbacks, but this arrangement doesn’t necessarily mean you’re finances will be at the mercy of fluctuating exchange rates. This is only true if you take a passive approach.

 

Currency fluctuation can lose you customers


Imagine you have a client in the US who requires £10,000 worth of goods from you. You invoice them in Sterling. One month the USD/GBP exchange rate is £0.7514, so the client has to send $13,308 to settle the invoice. But the next month the pound has strengthened; the USD/GBP exchange rate is now £0.7346, and the client must transfer $13,612.

That’s an over $300 difference they have to account for. The impact of exchange rate fluctuations can be even more marked if your customers are paying Sterling invoices in Australian dollars, New Zealand dollars or Canadian dollars.

This creates numerous problems for the client, including:
  • Repricing
  • Reduced sales
  • Hedging problems
  • Reduced margins
 

Protect your business from currency risk


Implementing a hedging strategy allows you to minimise the risk of currency fluctuations on your bottom line.
Tools such as a non-investment forward contract can help stabilise your cash flow and increase visibility, while fixing the amount you’ll receive from overseas funds once it’s converted back into Sterling.

A forward contract is an agreement to purchase currency at the current market rate up to a year in the future.You can freeze a favourable exchange rate and use it to repatriate your next invoice once the funds have been paid into your foreign currency account by your customer or customers.

By using some simple hedging tools, you can offer additional value to your customers, without overly .exposing your business to currency market volatility. Your customers get a better level of service and more incentives to remain loyal, while you can counter exchange rate volatility, or even use it to improve the revenue you receive from export orders.


 

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