Running a small business can be very demanding, with many roles to juggle and many commitments to meet. If your company has any business dealings outside of your boarders, you will most likely have to deal with the foreign currency market. This can be a complicated and frustrating business, especially if you do not have much experience in it.
If you have property overseas, your company imports or exports, has foreign staff or any other international dealings, you will need to deal with foreign currency. The forex market is fickle.
This article will give you some basic information and advice on how to effectively manage international financial transactions.
Foreign currency exchange explained:
When one currency is changed into another currency, or exchanged, that is called forex or foreign exchange. The value of each country’s currency is not static; it rises or falls constantly, relative to other currencies. The two currencies that are being exchanged in a transaction are known as the currency pair. The amount of the second currency that you will receive relative to the first currency is known as the exchange rate.
Let us look at an example. If you had Euros and needed US Dollars, the currency pair in this case is the Euro/US Dollar. Currencies are normally represented by a 3 letter code to represent the country and the currency name. In this case, the Euro would be the EUR, representing the Euro Zone and the Euro while the United States Dollar would be represented by the letters USD. The currency pair will be stated as EUR/USD.
The first one, the currency you hold is known as the base currency and currency you wish to get is the quote currency. The exchange rate defines the amount of the quote currency you will get per unit of the base currency.
In this example if the exchange rate was 1.059, you would get $1.059 for one Euro.
Exchange rate fluctuations:
Exchange rates fluctuate constantly and often quite dramatically. The foreign currency market is highly volatile. Exchange rates are impacted by a number of factors such as political, environmental, social and economic issues. It is often difficult to predict which way a currency might move.
The timing of your transaction becomes critical. If you have to buy foreign currency when the base currency of your country is weak, you will get less in return than when you currency is strong.. The exchange rate is constantly changing and a few days, sometimes even hours, can see a massive difference in the value of a currency.
Being aware of these fluctuations and trends in the market will be to your advantage. There are companies that help business to manage this process.
How to manage foreign currency transfers for the small business:
Now that you have a basic understanding of foreign exchange, what is the best way to manage this process? You will need to do some homework and research. Contact several foreign exchange providers to see how they operate. You will need to find one that understands your environment and can offer cost effective service.
The two main options to use are your bank, if they offer this service, or one of the many currency brokers available. It is a highly competitive market so shop around and find one that provides good service at a reasonable rate. As they are specialists, they may well be able to get you better rates and assist you in managing the risk.
They will also provide a valuable service keeping you abreast of any developments and changes in the market. They study the activity daily and have a great understanding of trends and issues. Some firms even off a service whereby they are able to provide you with a fixed rate for a specific period. This eliminates the risk factor and makes budgeting easier.
If your business has to make regular transactions involving foreign currency, do your research and enlist the help of an experienced company to assist you with this, leaving you free to do what you do best, running your business.