When companies do business overseas, they have the added stress of dealing with foreign currencies. And if it’s not done right, what initially appears to be a profit could turn into a loss, says Brian Simonson, senior vice president of foreign exchange trading at Bridge Bank.
“Companies should consult with a banking partner to help them navigate overseas currency markets,” says Simonson. “While you need to understand what you’re doing in that regard, you also want someone who deals in foreign currency markets on a daily basis, someone who’s watching those markets and who understands the nuances of foreign currencies.”
Smart Business spoke with Simonson about how to approach foreign currencies so that what appears to be a win doesn’t turn into a loss.
How should companies approach doing business overseas?
It’s best to have a foreign exchange strategy in place before expanding to a foreign country, even if there’s not going to be a lot of activity initially. As your volume grows and your needs get more sophisticated, you have to make sure that you’re getting a competitive exchange rate on the conversions you’re doing, whether that is sending money to another country or receiving foreign currency payments from customers abroad.
Companies also need to be cognizant of how they invoice for their products. Invoicing in U.S. dollars, for example, can make what was once a competitively priced good not as competitive in foreign markets. So while using the U.S. dollar for invoicing may reduce the burden on accounting, it may also inadvertently reduce demand for your product.
As your business grows, you want to protect your profit margin against adverse exchange rate movements, which you can do through hedging by locking in a rate today for future payment. If you have a subsidiary in another country that you fund every month, you want to make sure that when you go to your board with a budget that you have correctly factored in the amount it’s going to cost (in U.S. dollars) and that that amount isn’t going to be adversely impacted by currency movements.
Conversely, if you have a large receivables base or large contracts in other currencies, make sure that you are protecting your profit margin. If you don’t, you could have a 10 percent profit margin today, for example, but when it’s time to collect that money, you could find the currency has moved against you and reduced your potential profits.
How can a business identify the right banking partner to help it navigate foreign currency markets?
If you’re working with a small bank, make sure it has a SWIFT terminal that allows it to communicate with banks globally. Does it have its own trading desk? A bank with its own trading desk gives you full access to whatever markets tools are available on the foreign exchange side, as well as the most competitive pricing. If that particular service is being outsourced to another bank, you’re more likely to incur an additional layer of fees before the money finally gets to the customer.
A good bank will take a consultative approach to how it does business with you. Many money center banks have international products and services, but they mostly serve Fortune 500 companies. If your business is small, or even mid-sized, you may not be running the volumes to get on their radar screens.
Instead, by partnering with an experienced smaller bank, you’re much more likely to receive a higher level of service so that you can focus on growing your business, not on figuring out the nuances of foreign exchange.
When you’re thinking about expanding your business overseas, at what point should you engage your banker?
You should form that relationship early on as part of a longer-term strategy, before even venturing overseas. An experienced banker can provide advisory services to help get your international business established and can help connect you with other professional service providers such as accountants and lawyers.
You may also need to set up foreign bank accounts, and it can be helpful to have a U.S.-based bank facilitate an introduction to a reputable and experienced institution.
A good guideline for when to consider doing FX hedging for your business is when you begin transacting in foreign currency amounts of more than $100,000 U.S. dollar equivalent. A banking partner can also help you to monitor your firm’s global financial situation. Currency markets inevitably change over time, and what’s appropriate for your firm today might not be advantageous for it in the future. Once you understand your transaction activity, you and your banker can determine whether it might make sense to realign your strategy with your business trends. A good banker will constantly evaluate the success of the program and make corrections as necessary.
What mistakes do companies make when trying to expand overseas?
In the case of foreign exchange, they fail to set up clear risk management objectives. They also tend to focus on trying to capture potential upsides in the market, rather than protecting their bottom line. So, instead of consulting various FX forecasts and allowing a ‘market view to drive strategic hedging decisions, keep risk mitigation your top priority. Companies often reach out to their bankers after taking a significant FX loss. By that time, it’s too late. Be proactive and reach out to your banker before any potential adverse FX rate volatility impacts your bottom line.
Any time a business is venturing overseas, the prospect can be daunting. Each country has its own way of doing business and its own way of banking, and it’s important to consult with a professional who is familiar with the pitfalls of setting up overseas and knows how to avoid them.
Brian Simonson is senior vice president of foreign exchange trading at Bridge Bank. Reach him at (408) 556-8377 or [email protected].
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