FX vs. SMB
…does it have to be a love-hate relationship?
As small and medium sized businesses continue to explore the international markets as places to buy and sell products, they must learn to navigate the stormy shoals associated with overseas currency/ exchange management.
For SMB’s struggling with Western economies that are sluggish and dealing with high levels of government debt, more and more companies are turning to emerging markets in Asia and South America for supporting future business growth opportunities.
Having said that, when the typical SMB ventures into digital markets that support their transactions using foreign currency…such business may come with the risks associated with both daunting logistical challenges as well as FX issues that can impact the profits from these efforts.
One of the greatest risks for SMB’s who are working in the international/digital markets is the threat of fluctuations in currency exchange rates. Currency strategies and hedging tools require a bit of research and (ideally) guidance from currency management companies that are experienced in working with SMB’s.
As an example, one of the biggest problems U.S. exporters face is the dilemma of whether to hedge their future order bookings to negate potential currency fluctuations… and if so what tools to use? As economies around the world struggle to regain momentum, SMB’s may often experience large swings in their order bookings, and as a result forecasting foreign revenues becomes very difficult.
For an SMB not intimately aware of FX transactions, even if their forecasting is correct and they do receive the expected amount of their orders, they can create “debtors” from abroad. In other words, any FX “forward” deals that are booked can become problematic as they have no “dating” on when they may be paid and what the exchange rate will be at the time of payment.
Many SMB’s that find success exporting their products abroad do not have the confidence to “hedge” thus causing the uncertainty of agreeing to prices well in advance of product delivery. While there is always the chance that currency could move in your favor…this it is a risk that most SMB’s would prefer to avoid. Under such circumstances, the risk that a currency may move in the wrong direction could easily wipe out the advantage of selling a product internationally.
What’s an SMB to Do?
Most SMB’s that are successful in protecting their profits generated from foreign transactions find it is necessary to learn effective hedging strategies. Most SMB’s know they should take steps to limit their currency risk when expanding their overseas sales. The problem is…how they should go about doing this?
A portfolio approach involving spot purchases, forward obligations and option products is fast becoming a popular way of managing currency risk for these SMB’s . An experienced currency management company such as MosaicaFX can help mix and manage these tools to spread transactional risk by securing attractive average rates for converting foreign currency back into dollars. Using a portfolio approach can mean that if certain contracts from abroad do not materialize or a payment is late, it becomes much easier to manage such a shortfall.
It can also mean that an SMB can choose to not hedge the entire amount of their exposure based on a more effective currency management program provided by a committed FX partner. It is precisely for this reason that for an SMB to properly manage their foreign currency exchange rate exposure they must partner with an experienced, trustworthy and conscientious FX company.
We would invite you to contact one of our Executive Account Managers at your earliest convenience to discuss how we can best provide you the support and guidance as an SMB you need to successfully navigate the international currency transaction arena. Let Mosaica help you maximize the returns on your new international opportunities!