In: Accounting
From the USA to the Czech REPUBLIC
Determines how exchange rates will affect your 805 beer business in terms of operational costs and pricing. Describe how you will modify these elements to be able to continue to increase profitability while reducing the possible detrimental effects of exchange rates.
Businesses interact with, and can be affected by overseas markets in several different ways; be it importing machinery from Europe or exporting your goods to China. In many circumstances, this will involve either receiving or sending a foreign currency from or to your business partner and so, naturally, you’ll have exchange rate exposure. This exchange rate exposure can affect businesses and the wider economy both positively and negatively. Here are outline a few examples of how foreign exchange markets can be a headwind or a tailwind to USA businesses.
How do Exchange Rates Affect a Business:
How businesses are affected by currencies can be roughly divided into transactional, translational, credit and liquidity risks. All four of these categories can then be subdivided several times to fit any and all kinds of businesses. But we’ll be focusing mainly on the transaction side – where the majority of foreign exchange impacts can be seen.
When paying a supplier, it’s this exchange rate exposure that can make a difference to your business. If, for example, you’re contracted to pay a Czech supplier for a shipment of goods in six months’ time at a cost of $50,000, every percent of change in the Czech Currency /US Dollar rate will have a direct impact on your bottom line. At the time of writing, the Czech Currency /US Dollar exchange rate sits at 23.05, making your final bill $45,500 if paid today. However, should the value of the dollar fall by 2.5%, Czech Currency /US Dollar would reduce to over 22.75, lifting your supplier payment to over $46,500 – meaning you’re paying an additional $1,000 for the same shipment of goods. Nonetheless, should exchange rates move in your favor (the pound strengthening in this example) then you’d end up forking out less for your dollar payment.
Any finance director or CFO who’s got experience dealing with multinational companies will know that holding assets and liabilities in a variety of currencies can be a burden. When you’re creating or submitting financial documents, balance sheets can be subject to sharp revisions or remeasurements if the value of an asset or liability has changed due to foreign exchange fluctuations. A loan taken out in Japanese yen will look very different on your sterling-denominated balance sheet from one quarter to another if currency markets are volatile, unpredictable and changing.
It’s not the nature of these risks themselves, but how you deal with them that will make a difference to your business. There are a number of different methods and techniques with which to approach currency markets.
Transferring money can be simple – spot contracts and short-term forwards can be a quick, easy and efficient way of moving your funds from one currency to another. But, this may introduce an element of risk to your business as there’s effectively no way of predicting what the exchange rate will be on your future transfers. So how can you know what your profit margins will be in one week, month or even years’ time? For some businesses, using hedging strategies or longer-term forwards can trim some of this risk and more complex payment solutions can be more suited. At the end of the day, it all comes down to you, your business and the way you approach foreign exchange.
A spot transaction is arguably the simplest way to transfer money across borders. Enquire at any currency specialist to receive a rate quote (this will usually be the interbank rate with a spread applied), once this is booked you send the broker the funds for the trade, which are then sent on in your chosen currency.
If you want to secure a rate but aren’t yet ready to make a transfer, you can choose a forward contract to fix a rate today for a specified date in the future. The great thing about a forward contract is that you know now exactly how much you’ll get when you’re ready to transfer. It helps you plan and protects you should rate move against you later. However, a forward contract could work against you if rates move in your favor after you have secured a rate. We strongly recommend that you chat through your options with one of our dealers before choosing what’s best for you.
Thanks for your time, hope it helped you.