If you have considered dipping a toe into importing or exporting, you may have balked at keeping up with the fluctuations in value of various currencies. Don't even try, says Guido Schulz, global head of strategic management at Los Angeles-based AFEX, a foreign-exchange consultancy.
Large international conglomerates have entire “forex” teams dedicated to managing finances across multiple currencies. As a small-business owner, you should not be trying to keep up with the second-by-second changes on your own, says Schulz. But if you don’t take steps to protect yourself, you could lose money, he says.
Consider a wine merchant who buys wines from France and sells to grocers and restaurants in the U.S. If the value of the euro changes dramatically between the time the merchant orders and when he sells, his profits could be wiped out in the currency conversion.
To protect against such losses, entrepreneurs are increasingly planning out their currency strategies. Since the start of the Eurozone-crisis three years ago, AFEX has seen more than a 25 percent increase in the volume of customers looking to lock in currency rates in advance. Small and midsize businesses make up most of its customers.
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Especially if you are just getting started dealing with multiple currencies, be sure to work with an institution that specializes in foreign exchange, says Schulz. It’s too much for most business owners to try to handle alone. Banks can help you, and so can many non-bank strategists, like AFEX or International Foreign Exchange.
Consider these tips from Schulz for how to manage your business’s cash flow across multiple currencies:
Charge customers in the local currency. It may seem like a good idea to charge your overseas clients in U.S. dollars, eliminating the need for any foreign currency swapping. However, by asking your customers and clients to deal with the foreign-exchange negotiations instead of you, your business could be less attractive and competitive, says Schulz.
Consider locking in an exchange rate in advance. Many small-business owners do not have the cash reserves to withstand a foreign-exchange loss. Schultz recommendst that you look at buying a “forward contract” from a bank or non-bank specialist, locking in your exchange rate for a set period of time. You will pay a commission on the contract, but what you buy is peace of mind. With an exchange rate locked in, you can plan your pricing strategy such that you know you won’t lose money. At AFEX, the commission is less than 1 percent of the transaction price for forward contracts, although prices vary depending on the specific contract, says Schultz.
Avoid “casino fever.” Entrepreneurs have to wear many hats to run their business, and they may get the idea that they can pad their revenues by “beating the market,” buying one currency and selling another for a profit. “That is actually a very, very dangerous thing,” says Schulz. Playing the market is too risky for a small-business owner and ultimately, a waste of an entrepreneur’s time, he says.
While it should be accompanied by caution and planning, trading with Europe can still be on the table for U.S. businesses. During the sovereign-debt crisis in Europe, speculation grew as to whether Greece, most especially, might exit the Eurozone. “What we have seen is an almost too-big-to-fail scenario,” says Schulz, and indications from European Union leaders that they will do what is necessary to keep the countries operating under a single currency. If any countries were to leave the Eurozone, an exit is expected to be planned and orderly, says Schulz, and business owners should not fear recent debts becoming suddenly null and void.
If your business operates across multiple currencies, what is your most useful tip for protecting yourself from fluctuations in the market? Leave a note below and let us know.