Preparing your business for foreign exchange risk

Every year we work in an increasingly global marketplace, and Canada’s metal manufacturers are no stranger to the growing need to reach beyond our borders.

Whether you’re buying new equipment to improve productivity and increase competitiveness, sourcing lower-cost suppliers, or tapping new customers in emerging markets, international business opportunities are numerous. While significant opportunity exists, cross-border business isn’t without its own unique set of challenges and risks.

Sending and receiving global payments in multiple foreign currencies, all tied to unpredictable exchange markets, is one factor that can be a real headache for manufacturers.

For small manufacturers without a currency plan or the in-house expertise to manage the risk of volatile currency markets, the potential negative impact of fluctuating exchange rates on profit margins is real. However, managing this risk might not be as hard as you think.

With an understanding of where your business is vulnerable to the effects of currency movements and what tactics are available to help you manage it, a currency specialist can help you implement a plan so you can spend less time stressing about global payments and currency exchange and more time growing your business.

Currency market movements

Currency markets react to various influences almost daily, whether it is geo-political news, oil and commodity prices, or economic policies. Typically, the factors that affect currency markets most frequently include:

1. Political and economic conditions.
2. Inflation or deflation rates.
3. Interest rates.
4. Monetary policies.
5. GDP.
6. Fiscal policies.
7. Commodity prices, particularly oil.
8. Unemployment rates.

But even news from a single stock can impact exchange markets. As an example, the recent news about Caterpillar’s bumper earnings figures for Q4 2017 not only boosted stock markets, but also helped to boost the U.S. dollar higher against the majority of its major counterparts, including the Canadian dollar.

During earnings season this can happen on a number of occasions. If you don’t have the ability to predict the timing and impact of the numerous influences at play, a smart decision is to actively manage your currency risk through a specialist firm.

Hedge against budget and pricing uncertainty

Identifying your exposure to currency fluctuations will help you develop a plan to minimize and, in some cases, eradicate the risk to the profitability of your international purchases or contracts. A personalized, concierge-style foreign exchange provider can help with this, but regardless of whom you choose, it’s helpful to find a partner that will get to know your business’s unique needs.

As an example, say your Canadian-based operation is purchasing a product from a manufacturer in the U.K. Once the agreement is complete, the physical sale might not take place until months in the future, when you’ll be required to pay in pounds. The GBP/CAD exchange rate could move drastically in that time, creating significant currency exposure.

With the help of a currency expert, you might choose to hedge your currency risk by locking in a forward contract. A forward contract ensures you know the exact exchange rate you’ll receive when it comes time to make that payment.

Forward contracts are a valuable tool in protecting the profitability of your contracts with set payment terms in the future. They ensure you’re not left relying on the need to make or receive a cross-border payment on a date when the exchange rate might be unfavourable. Without the use of a hedging tool like a forward contract, forecasting cash flows and budgeting can be highly inaccurate because of possible currency market fluctuations over the course of your contract.

While the downside of establishing a forward contract is that you might not be able to take advantage of market highs, the certainty of knowing your exchange rate in advance can be critical in maintaining profitability.

If your international payables or receivables have flexible timelines, market orders can be another valuable tool to manage your currency exposure.

Currency markets are live 24 hours a day, so pinpointing the more volatile times when a currency swing might be in your favour can be difficult. Market orders are always active, giving you the opportunity to take advantage of favourable currency fluctuations during overseas trading hours and automatically purchase the foreign currency when the market hits your targeted or budgeted exchange rate.

Use the best payment option

Currency specialists can also ensure your international payments are transferred to and from your bank accounts quickly and cost-effectively. This can be particularly valuable to manufacturers who are susceptible to the negative effects of missed or late payments that cause costly delays.

Thankfully, most foreign exchange providers can easily provide timely confirmations of any payment regardless of the financial vehicle used to send the money. This means your vendor can rest assured that your payment is on its way and won’t hold up your timelines.

A foreign currency specialist might also suggest a more cost-effective form of electronic fund transfer depending on your business’s needs. If you have a list of U.S.-based suppliers that must be paid each month, a form of electronic fund transfer called ACH (Automated Clearing House) can be used to make your payments. While it’s not as quick as a wire transfer, it is free, which can affect your bottom line at year-end.

Or maybe you have a one-time sale from a Europe-based customer. A foreign currency specialist with access to international banking networks can accept a foreign currency payment on your behalf and then deposit it into your Canadian bank account at an agreed-upon rate and time. This ensures you’re not left at the mercy of your financial institution, which may automatically convert the funds at an unfavourable Canadian exchange rate when they are deposited into your account.

Currency is complicated, but smart choices can help ensure international borders aren’t barriers to growing your global presence. With an understanding of the various factors that influence currency markets and by tapping the expertise of someone who understands what they mean for your business to develop a plan to manage them, you can rest assured currency exchange won’t jeopardize your bottom line.