If you’ve been in business for a few years now – or have kept an eye on the currency rates – you’ll know that exchange rate fluctuation is a very typical thing.
As the saying goes; ‘‘you might not be able to control what happens around you, but you can control how you react to it’’.
If you’re a business founder, owner or a member of the managerial team, you’ll know better than anyone that learning, evolving and adapting is the only way to protect your business, and ensure its success for years to come. So how can you do just that when it comes to exchange rates? click here
Exchange rates are the price of foreign currency that an amount of one currency can buy e.g. one-pound sterling. An increase in the value of the sterling means one pound can buy an increased amount of foreign currency, meaning you are getting more for the same amount of money. Domestic trading business must also be aware of changes in exchange rates as they will have an indirect impact by virtue of the wider economy.
IMPACT OF EXCHANGE RATE IN BUSINESS WORLD
Business strategies and movement may sometimes entirely depends on the exchange rate of a country. In addition to its direct effects on the global trading and production structure, the ongoing process of globalization may have important implications for the interaction of exchange rates and the overall global economy.
If you run a business that sells products or services to a country abroad, then a change in the exchange rate will have a direct impact on your bottom line. The force of the impact will be dependent on how invoices are issued. Issuing invoices in your local currency should have a lesser impact, as the overseas buyer must change their local currency into yours to make payment. You’ll receive the full invoice amount regardless of where the exchange rate sits. The potential risk here is that your prices may become uncompetitive as a result of variations to the exchange rate, leading to lost market share against foreign competitors who do not have to include transactional exchange rate changes.
As with selling overseas, if your business contracts with a supplier from a foreign country, you become vulnerable to fluctuations in the exchange rate. For example, if you purchase goods from a supplier in China and payment of 300,000 Chinese Yuan for your next shipment is due in a month’s time with an exchange rate of 8.74, your invoice would sit at £34,330.83 if paid today. However, in a month’s time when the payment is due if the exchange rate has moved to 8.8, your invoice would change to £34,090.90, meaning you’re paying £239.93 less for the same shipment of goods. Of course, if the exchange rate was to go the other way, you would have to pay more for the same amount of goods.
Changes in the exchange rate can indirectly impact your business, even when you do not buy or sell goods and services overseas. For example, in the cause of transporting products around the country using delivery trucks and the cost of fuel is raised due to changes in the exchange rate, you will end up paying more for your shipments to be delivered. Exchange rate volatility can also have an effect on competition. Depreciation of your local currency makes the cost of importing goods more expensive, which could lead to a decreased volume of imports. Domestic companies should benefit from this as a result of increased sales, profits and jobs.