More small businesses are taking advantage of today’s global economy to tap into foreign markets. But the chance to boost revenue comes with a heightened risk of getting burnt by volatile exchange rates. Large corporations have teams to handle transactions in multiple currencies. For small business owners, good financial management is key. These tips can help.
Find out your exposure
Businesses that import or export or have assets and liabilities in foreign currencies are impacted by exchange rate fluctuations. You can end up paying more or less than you originally expected. This type of exposure that impacts cash flow is called ‘transaction exposure’. There’s also ‘accounting exposure,’ which is when foreign currency assets and liabilities get converted to Indian rupees for accounting, leaving gains or losses. Financial management can guard against these risks. Once you know your exposure, it’s just a matter of planning and safeguarding with tools and techniques, such as hedges.
Use hedge instruments
‘Hedging’ means investing to reduce the risk of exchange rate fluctuations. Businesses do it by purchasing instruments from banks and brokers, such as forward contracts, currency options, and swaps. Forward contracts let you choose the rate at which you buy or sell an amount of foreign currency in the future. But remember, terminating the contract typically comes at a cost.
If you want to gain from favorable movements you can opt for currency options. These provide the right, but not the obligation, to buy or sell currency. While swaps involve buying and selling at the same time and can help you match receipts and payments in foreign currencies. A bank or broker can help you plan and purchase instruments. The Reserve Bank of India also lists licensed brokers.
Invoice in foreign currency
Invoicing in Indian rupees forces customers to take on currency risk, which can turn them away and make it difficult to enter new markets. Foreign suppliers also generally pad invoices to mitigate currency risk. By invoicing in a foreign currency you become more attractive to customers and may be able to negotiate discounts from suppliers.
Open a foreign currency account
If you have a lot of transactions in one currency it can pay to set up a foreign currency account. This reduces the need for transfers and means you have foreign currency at the ready. When you do transfer the funds you can wait until the exchange rate is favorable or get a better rate through a broker.
Use multi-currency accounting and budgeting tools
Accounting and budgeting products are now available that let you calculate gains, losses and total currency exposures for multiple invoices. So you can see how much your foreign cash flows are worth in Indian rupees on a single platform, which saves you time and enables better-informed decision making. QuickBooks has multi-currency features that make it easy to receive foreign payments, purchase goods in foreign currency and hold a foreign account. Remember, the sooner you’re mitigating risk, the sooner you can realize the true potential of foreign markets and get on track for bigger profits.