Thousands of SMEs across Australia make money by either importing goods and selling products to the Australian people, or, exporting goods and selling to markets in other countries. Sounds fairly simple, right? The greatest challenge these types of businesses face is minimising financial loss as a result of fluctuating foreign exchange rates. The risks of dealing with foreign currencies for SMEs include:
- Profits can be wiped out by a bad foreign exchange deal. If a company picks the wrong moment to complete a currency transaction, it could lose out to a poor exchange rate.
- Hidden costs of transfers can eat away at profitability.
- Business forecasting becomes extremely difficult during times of uncertainty in the currency markets because the changing exchange rate means a company cannot be sure how much it will receive from a deal.
We put together a list of foreign exchange top tips to help SMEs minimise loss and maximise profit.
(1) Look ahead, be prepared.
Currency markets can move quickly and suddenly in response to things like political events or significant international economic news. You could try and keep up with it all yourself but signing up to a site that provides daily updates is probably a lot easier and quicker.
(2) Benchmark Your Bank
Comparison sites now exist for SMEs to compare bank and broker rates online.
Compare the rate offered by your FX provider and negotiate better rates to cut costs and improve your bottom line.
(3) Communicate with Your Broker
The best brokers will take time to understand your business operations. They will have their finger on the pulse and will know, based on previous years, the best time to buy and sell currencies. Build a strong relationship with your broker and arm them with as much information as possible, with plenty of notice. By giving them plenty of time, your broker can identify impending peaks and troughs in rates and can pick the right time to exchange on your behalf.
(4) Know the price of your currency?
The ‘spread’ is the difference between the price the broker pays for your currency and they price at which they then sell it on to you. Ask the tough questions to your broker to secure the best deal:
- How much is the broker making from each order?
- Do other fees apply to the agreement? Please explain the fees.
- Will the ‘spread’ be same next year? Or will the broker increase the spread?
(5) Consider all options available
Many businesses use a combination of spot contracts, where you accept a given exchange rate ‘on the spot’, and forward contracts, which allow you to fix a rate for up to three years. Alternatively, the answer could lie in a made-to-measure currency option which could give you the protection of a forward while also allowing you to benefit from the upside if the market moves in your favour. There are pros and cons whichever approach you choose and a good broker will explain everything before you decide.