Many people do not comprehend how business foreign exchange affects the world economy. The daily lives of locals are only impacted by their local currency, which remains steady. However, it’s not the same for businesses, especially those that deal with international trade.
Businesses can be heavily impacted by the volatility of currency exchange rates, ranging from mild to severe. Companies relying on international trading operations are the most affected, but it can also affect many other firms indirectly.
The following examples illustrate how businesses can be protected despite the implications:
If you run a business that sells products or services to a country abroad, then the exchange rate will directly affect your bottom line. How invoices are issued will determine the force of the impact. In the event that invoices are submitted in foreign currency, there remains a risk of receiving less money than expected if the exchange rate fluctuates between the time the invoice is issued and the date of payment.
It is not as detrimental to the buyer as issuing invoices in your local currency, since the overseas buyer must change their local currency for payment. The full invoice amount will be credited to your account regardless of the exchange rate. There is the risk that your prices may become uncompetitive because of variations in exchange rates, causing your share of the market to be taken by foreign competitors who are not concerned with these fluctuations.
The exchange rate can affect your business if you contract with a foreign supplier as you do when selling overseas. For the same amount of goods, if the exchange rate changed the other way, it would cost more. To mitigate the risk in their business, some companies put forward contracts that fix exchange rates for a specified period of time.
Exchange rate fluctuations can have an indirect effect on your business, whether or not you buy or sell goods and services overseas. When an exchange rate change raises the cost of fuel, the cost of delivering shipments increases. If you transport products across the country using delivery trucks, you will pay more for them to be delivered.
Volatility in exchange rates can also affect competition. Depreciation of your local currency raises the costs of importing goods, which decreases the volume of imports. As a result, domestic companies should gain revenues, profits, and jobs.
While the fluctuations in exchange rates can have a significant effect on businesses, there are either benefits or drawbacks associated with them depending on the type of business. Following a currency appreciation or depreciation, import and export businesses can benefit or suffer.
Besides direct factors, foreign currency conversion fees play a large role in how a business is affected. To hedge your business against losses, you might want to consider working with limited currencies, using fixed contracts, or maybe even business FX.