The 3 simple steps to better exchange rates for your business, forever.
In the world of foreign exchange and cross-border payments, SMEs are the worst off every time and frankly, I’m sick of it.
In my 25+ years of working closely with SMEs, their needs and knowledge gaps on the subject have remained the same and sadly the large losses resulting from poor or non-existent FX strategy have remained. the same.
Last year alone, a whopping average of $32,500 was overspent on exchange rates by SMBs – that would never be the case for large corporations, and it’s time for that to change.
Currency issues affecting SMEs
There are a lot of things related to lack of knowledge and motivation when it comes to SMEs and their international payments, especially since so many things are changing, like rates, business goals, individual opinion. At the same time, much remains dependent on the style of each company and its owners. That means it’s different for everyone, at every stage.
It is certainly not one size fits all, or even a few, when it comes to managing and planning foreign currencies. This only adds to the complication and difficult task of figuring it all out.
Unnecessarily, the foreign exchange market has become even more volatile over the past decade and to add to that, every couple of years we have various socio-economic and political events that further alter the forex market. Things like Trump’s victory, Brexit and the Covid-19 pandemic caused seismic shifts in a single day and figures show there was an average annual move of around 20% in AUD and 14 % in GBP. This type of volatility can effectively wipe out a year’s profitability for a small business.
While business owners understand their most obvious needs with foreign currencies – better rates that lower their costs – my experience has shown me time and time again that they never prioritized taking the time to understanding and defining what a better rate looks like for them, not to mention planning how to get it. I understand why, but it’s time to change now.
What SMEs can do to get a better exchange rate
The most important step is to examine what you do with foreign currency and reframe its importance in your business. If you’ve read this far, it probably plays a big role and deserves more attention.
Here is a brief description of the steps for a decent analysis of your existing forex strategy.
Step 1: Who do you use for your foreign currency?
Using a single provider, which will likely be your bank, can be a hassle. In 2020, the loyalty tax of SMEs using their banks exclusively made them pay on average 10 times more than their corporate counterparts for foreign currency.
Instead, using smart technology to help you assess your future foreign bill requirements is the best method here for a comprehensive review of your foreign exchange position. Analyzing past rates and bill amounts alongside your upcoming bills allows you to take advantage of technology that provides foreign currency information.
‘Am I using the correct suppliers for this invoice?’
The growth is huge for SMEs. Making $20,000 one month to $200,000 the next means the business has to scale and change as well. Continually wondering ‘am I using the right vendors for this invoice?’ and leveraging smart technology, you’ll get the most out of your sales.
Step 2: How do you get your foreign currency?
Hoping to get a good rate on the day you pay is not a solid strategy. But buying little and buying often is. The idea – and the goal – is to achieve an averaging effect to smooth out substantial market ups and downs to truly make your business resilient.
When talking to your suppliers, remember that this is a market: knowledge is power and it’s all about leverage. It is important to know in advance exactly how much you need and how often you need it.
Don’t forget that you are not asking “the price”, you are asking “their price”. There is a difference.
Step 3: What am I risking with my change?
These first two steps will put you in a good position quickly, but the best gains come in the business with a long-term plan.
Foreign currencies are intrinsic to the success of your business, so your plan should start with what matters most to your unique business.
The best plans first address these three trading risks before finally setting a goal for their forex plan.
Risk 1: Your customer. How soon can you change your prices if your costs increase?
Insight: You risk losing market share by changing prices too often.
Customer loyalty is a two-way street. Just as we would prefer consistent revenue figures, the customer also wants this in their purchases. As your prices change to account for currency fluctuations, your customers are likely to switch to those with stable prices, putting you at high risk of declining market share in your industry. .
Risk 2: Your commercial margin. How much of your currency risk are you willing to absorb?
Insight: When you hide your losses in your margin, you reduce the selling value of your entire business by a multiple of 2 to 4 times that amount.
For many, absorbing the fallout isn’t a conscious decision and if it is, it’s not often seen as a forex choice. As with anything bottom line, we only want the best, but hiding currency losses can seriously reduce the overall value of your business and have long-term negative repercussions on external investments, strategy and performance. planning.
Risk 3: How much rate change can you and your business bear?
Insight: 90% of business owners risk too much, then panic and buy currencies at a worse rate.
Fear and business do not mix well and I am sure that in all other facets of your business your risks are limited or at least much more calculated. It comes down to the lack of expertise and time that SMEs have in the FX space, affecting more than just a “less than ideal” rate on a single monthly bill.
After understanding your risk, develop a strategy that reflects your business goals and strategy, as well as your style, the business owner. If you’re not comfortable with that, it won’t work.
Optimistic words to end
I understand, dealing with foreign currency is difficult, time consuming and the rewards are not always felt instantly. Your circumstances change, and so does the market, so you may feel like you’re continually peddling on the spot. But the good news is that we are now in another era, one of better technology and greater automation.
So, use your accounting software’s analytics and all their market add-ons to help you view your foreign invoices in a different light. Ultimately, taking the time to reflect and assess the importance of the role of foreign currencies in your business will drive the change to better exchange rates.