Foreign exchange made simple
Exporting can come with a variety of challenges – whether that’s a language barrier or cultural obstacles to navigate. One of the most common difficulties that may affect you and your business, though, is trading in another currency.
We take a quick look at the risks of working in a foreign currency – and how you can manage them.
What’s the deal with selling in another currency?
UK exporters selling in a currency other than sterling are exposed to currency risk. You set the price of your product based on the current exchange rate, but, if that rate falls, your prices will be worth less when converted back into pounds.
How can I mitigate that risk?
The easiest option is to request payment in sterling, however, this may not be possible as foreign consumers may find it difficult to pay this way. Business customers may simply refuse – especially when they have local and foreign competitors quoting in their currency.
What else can I do?
Consider using financial instruments to manage the currency risk – your bank, for example, will be able to advise on ways to manage currency risk, although you could also consider independent advice too. There will be costs involved.
Should I just take the risk?
It is good business practice to manage the currency risk – even the euro and dollar exchange rates can move dramatically over time. Many exporters have been tipped into loss by adverse currency movements.
Do I need a foreign currency account?
If you have payables and receivables in the same currency, then yes, as you may be able to net payments and receipts, but do remember that unless there is an equal match of currency payments and receipts, you will have a net currency exposure to manage.