LAEDC Member Cambridge Global Payments Gives Local Businesses Strategic Advice to Reduce Foreign Exchange Rate Risk
In the global economy, manufacturers and exporters are facing obstacles on every front. Operating in markets outside of the United States can create a huge risk as the variability of exchange rates can change a profitable sale into loss between the time a sale is made and when funds are actually received. This circumstance is further exacerbated when manufacturers are committed to set pricing for a period of time before the volume of sales is fully known.
Fortunately, these risks can not only be effectively managed, but actually turned into opportunities if addressed early.
Establishing and implementing an effective foreign exchange risk management program is critical and starts by addressing the following 8 points:
- Enhanced Business Opportunity –Perhaps the greatest benefit of transacting business in currencies other than the U.S. Dollar (USD) is that it opens you up to markets and customers that otherwise would not be available. Even as today’s market becomes more global, manufacturers and exporters are finding that many customers still prefer to operate in their local currency for simplicity and if you are not prepared to work with them under these terms, rest assured your competitors will…It is time to compete !!
- Market Volatility –The Foreign Exchange (FX) market is in a constant state of flux and the value of the USD versus other currencies never sits still. An effective hedging program seeks to remove this variability and establish a known USD value for payables and receivables. This benefit is invaluable to both exporters and importers alike, as it allows them to operate with a higher degree of certainty of costs or profitability.
- Rapidity of Payment – Manufacturers are seeking faster payment to reduce their A/R exposure whereas Importers are looking to delay payments as long as possible, all with an eye to reducing working capital needs. The practice of sending checks is rapidly becoming a thing of the past with some countries looking to completely phase out the use of checks within the next decade. Moving forward, electronic funds transfers such as Fed wires, SWIFT and ACH transfers will represent 99.9% of international commercial transactions and the expected medium of exchange. The benefit to all business is the ability to time payments and receipts to the day rather than approximating for mail times. Furthermore, the cost of these electronic transactions prove beneficial. Various banking associations estimate the cost to businesses of issuing a check to be somewhere between $3.50 and $8.00 per check. A quality global payments specialist will never charge a fee for a transaction that includes a foreign exchange component and only $5.00 for a USD-denominated wire where no currency exchange is involved.
- Enhanced Margin/ Reduced Cost of Payments – Make no mistake…Without exception, cross-border transactions involve currency exchange. If you are not engaged in it, your customer is and potentially paying too much for the exchange. Noncompetitive exchange rates are unnecessarily increasing the cost of doing business and historical analysis can identify very real opportunities to boost cost effectiveness as well as unlock extra profitability
- E-commerce has grown to the point where it eclipses traditional commerce models and business is now conducted 24 hours a day, 7 days per week. In facing this, today’s businesses need up-to-date information and the ability to immediately protect known exposures. Global payment specialists have responded by providing on-line access to trading and payment platforms allowing customers to lock in transactions and initiate wires from their desktops around the clock. Be certain to find a provider that does not restrict the hours within which you can conduct transactions to standardized banker hours.
- Maintaining Cash Balances in Foreign Currencies – As a result of global transactions, companies are finding the need to maintain foreign denominated balances in their accounts other than USD. This can be for a multitude of reasons such as paying local sales commissions, transportation expenses and taxes. Look for a partner that can provide this capability, preferably free of charge, to its clients allowing them to maintain and manage their balances as required.
- Global Market Expertise – Recognizing that future growth needs to come from expansion into international markets, it is vital to have expertise in how these markets operate. A global payment specialist well versed in the economic conditions and practices within international markets can help you to sidestep mistakes that may result in delayed payments, excessive costs and pricing fluctuations.
- Anticipation of market-changing events is critical in international commerce. Aside from understanding the economic conditions of your markets, your specialist should be on top of the emerging issues affecting these markets. Government elections, coming changes in interest rates, taxes and other conditions can rapidly and significantly impact the value of currencies. Wouldn’t it be nice to have an expert around to advise you on impending factors that affect your international success ?
About the Author
Douglas Carp is the Head of Trading for the Western US territory at Cambridge Global Payments, North America’s largest bank-independent FX brokerage. Having run the foreign exchange sales and trading departments at M & T Bank as well as American Express Bank International, Mr. Carp has leveraged his 30 years’ worth of experience within the corporate sector as a Treasurer and CFO of large multinational entities by serving on various Boards of Directors.
A graduate of Rutgers University with a degree in Economics, he went on to earn his MBA in Finance from New York University and further accreditations in in various subjects including operations research, quantitative economics, global macroeconomic theory and risk quantification.