Accounting in foreign currencies – challenges and how to overcome them

Leeann Nash September 5th 2023 - 3 minute read

For businesses dealing in multiple currencies, accounting can come with additional costs and complexity. But there are ways to overcome these challenges and mitigate the risks.

Here we take a look at some of the common mistakes businesses often make when accounting in foreign currencies and how to fix them.

Taking and making payments

When a business is transacting overseas, they’ll need a way to make and receive payments in foreign currencies.

One option is to open a new bank account in the required currency. However, this can get complicated when multiple currencies are involved, and many banks charge transfer fees, which can eat into revenue.

Another option is for the business to use a payment service that integrates with their bank. While this is simpler, it doesn’t always provide the strongest exchange rates and the company may have limited control over their transfers.

The best option is to open a multi-currency account. It’s easily scalable, whether handling two currencies or ten, and the client can manage all their transactions from one streamlined account.

Exchange rate fluctuations

Another challenge that foreign currency accounting can pose – perhaps the biggest challenge – is the impact of exchange rate fluctuations. Currency markets are notoriously volatile, which can pose risks to profits and make budgeting difficult.

For instance, if a company’s native currency weakens, they could lose money as foreign services and goods cost comparatively more. If the foreign currency weakens, they’ll get less when they repatriate revenue into their native currency.

Businesses can insulate their cash flow from volatility, however, by using specialist services. For example, a forward contract allows a client to secure an exchange rate in advance. While they won’t benefit if the rate improves, they’ll be protected from any negative shifts and they’ll know exactly how much they’ll be getting.

Another option is to use market orders, which allow a business to capture favourable market movements or mitigate negative ones.

A business can use a limit order to target a rate above the existing rate. If the market reaches that level, the transfer is automatically triggered. Meanwhile, a stop loss order involves targeting a worst-case exchange rate. Again, the transfer is automatically triggered if the market reaches this level, stemming any further losses should the rate fall even further.

Businesses can also use limit and stop loss orders in tandem. Once one order is triggered, it will automatically cancel the other. This allows clients to potentially capitalise on an improvement in exchange rates while protecting themselves from a downturn.

Added complexity

Alongside potential risks for revenue, accounting in foreign currencies can add complexity and another level of admin.

As mentioned above, using a multi-currency account can streamline all transactions into one account, but there are other challenges businesses need to be aware of.

For instance, companies will need to ensure they’re reporting everything accurately. Tax authorities will need all transactions converted into the home currency, including things like VAT and invoices.

In the UK, HMRC provides its own exchange rates every month for businesses to use when accounting. Regardless of the fluctuations in the market, companies will need to use the official HMRC rates for reporting.

Currencies Direct

While accounting in foreign currencies can come with challenges, there are also opportunities.

With a Currencies Direct account, businesses can check their transfer history across multiple currencies all in one place. This can save a huge amount of time and admin when reporting or reviewing transactions.

Currencies Direct can also help businesses to mitigate the risks while maximising the rewards with excellent exchange rates, streamlined services, and a personalised approach.

Get in touch to find out more.

Written by
Leeann Nash

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