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13 May 2020

Risk Management for Operating Internationally

Risk Management for  Operating Internationally
Do you operate internationally? Do you have an exposure to foreign currencies? Here are some challenges agri-businesses face when expanding overseas.

It is becoming more and more frequent for UK based agri-businesses to expand into global markets. Here at Cambridge, we have spoken to many businesses who face challenges when it comes to Foreign Exchange and highlighted some considerations to make when venturing overseas.

To begin with, the challenge. Let us say you invoice a customer $1m with 90-day payment terms. On day one, you use the market rate of GBP/USD 1.2500 to work out your equivalent revenue in GBP.

$1m @ 1.2500 = £800k

However, by day 90, when they pay, the rate of exchange has moved to 1.3000.

$1m @ 1.3000 = £769,230

Revenue depreciation: £30,769. How can this be managed better? Here are four points to consider when you address expanding into global markets.

  1. Accept payment into the correct currency account. Even today, it is still common for businesses to accept a foreign currency into their GBP account. The charges applied to this can be substantial, commonly at 3-4 per cent by the Bank. When our clients move into new international markets, Cambridge have over 30 currency accounts which they can utilise when accepting foreign currency revenue. At that stage the business has the control of the conversion, generating a substantial cost saving and allows you to convert the funds as and when it suits you best.
  2. How is broad your provider’s FX portfolio Check what type of FX products they offer. Having access to a broad portfolio of FX solutions may be important if you want to develop a robust hedging strategy. If your needs are simple, you may only need access to spot transactions. However, if you are a larger business with more exposure to currency, a range of products could be important.
  3. Focus on the FX losses at the end of the year. The foreign exchange (FX) market can be volatile and some days you may see market move by one per cent or more. If you begin to pay a supplier or receive from a customer the foreign currency equivalent of £100,000, a one per cent move in the market would make a £1,000 difference to the cost or sale. Most businesses don’t have the time or resource to monitor the currency market regularly or the knowledge to protect themselves against market volatility. There are several currency market specialists that you can speak to for help. There is also a range of products that allow you to fix the FX rate providing you peace of mind.
  4. Consider your provider’s international payment capabilities. Not all FX specialists offer the ability to send third party payments. If you need this option, it may make sense to work with a provider who can facilitate currency exchange and send funds on your behalf. Not all providers can send funds to all destinations in all currencies. If your business makes payments to exotic destinations in emerging market currencies, check that your provider can do this. Some providers will have specialists with expertise in exotic currencies. Working in foreign currencies can be complicated and without special care can lead to losses as the currency markets shift. Taking advantage of dedicated services in this area can mitigate these risks and make any foreign expansion worth so much more.

Currency Risk Management from Cambridge Global Payments on Vimeo.

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