Developing a foreign exchange strategy

Exchange rate risk is a reality for exporters. And with so many products on offer to help reduce your exposure, a foreign exchange management strategy is ideal for exporters who want to stay one step ahead of foreign currency deals.

All exporters, whether they like it or not, have to deal in the foreign exchange (forex) market, and if there’s one thing that’s certain in foreign exchange, it’s that nothing stays the same.

In a perfect world, though, you’d be able to charge your overseas customers in Aussie dollars and they’d pay you in Aussie dollars, keeping your cash flows and profit margins solid. But in many cases, when you’re exporting goods or services, the people you’re exporting to don’t want to make payments in $A, explains Basil Payn, regional director for foreign exchange at Travelex. “Most exporters will have an objective to sell as much as they can to as many customers as possible, so unless you’re in a position of power where you’ve got a product or service that nobody else provides and the whole world wants, you really want to make it as easy as possible for people in global markets to buy from you.”

David Marshall, Bank of Queensland’s group executive of business financial services, agrees saying if exporters can arrange their business in a way so they don’t incur any currency risk (i.e. only get paid in $A) that’s great, “but I can’t help but think that there’s going to have to be some relative impact in price, because the importer on the other side is still going to want to get a competitively priced, good quality product”.

So, to keep customers happy, many exporters will allow importers to pay for goods or services in their local currency, or the more globally accepted ‘basket’ currencies, such as the $US or the euro. But as currency movements throughout 2007 have indicated, exchange rates are volatile and potentially harmful to exporters, especially as the Aussie dollar continues to rise against the $US.

At the time of writing, we’d seen movements of up to 15 percent in the exchange rates in the preceding two months. “That can easily wipe out your entire profit,” warns Payn.

Strike Group Australia is an inventory solutions provider for major stockholders of mobile phones and accessories around the world. Launched in 2001, the company was a ‘born global’ and now exports into 73 countries around the world with the majority of their business in the US, Hong Kong, Europe and the Middle East.

Consequently, general manager Paul Branagan says exchange rates have a significant impact on the business. “It’s very important how we manage those, particularly at the moment when there’s a lot of volatility in certain markets. It’s a very important part of our business and our financial people spend a lot of time tracking the international currency moves.”

While exchange rates can play for you, as much as against you, when it comes to running a business a level of certainty is needed. “You’d rather have as many as your costs fixed as possible to be able to plan for your cash flows,” says Payn. “It’s very difficult to run a business not knowing how much you’re going to receive for something.”

While an ad hoc approach might suit some, Marshall believes this can be extremely risky, especially for those inexperienced in foreign exchange. “There will be plenty of people who’ll be able to show you all sorts of graphs to say that if you do nothing you’ll be better off. But I think it depends on your financial position, your gearing, your length on time in the business, your experience, your research and your technical expertise.”