Currency management is now a key tool for many businesses involved in the global economy. The major factor affecting businesses is the impact that currency exchange rates can have. Any organisation which deals with cross-border payments overseas now needs a robust currency management system in place.
The basic reason is that it will preserve cashflow and help to protect business capital from fluctuations in the currency markets. Effective currency management will mitigate the risk when exchanging a foreign currency into your own. Making sure you get the best value when conducting international money transfers is essential for the financial side of your business.
If you fail to pay attention to managing your currency dealings effectively, in the long run it could really come back to haunt you. With that in mind, it is key to think about how you will do this and what the best strategies are for currency management in the modern business world.
Currency management has changed over time
The simple truth behind this kind of financial management is that your company needs to keep more of the money it is sent and also to be paid the amount you were expecting. There have been various ways organisations have looked after this previously. The major ones include:
- Clever invoicing – one classic way many businesses dealt with managing their currency risk in the past was to have the order and invoice in their own currency. This effectively gives the other party in the transaction all the risk and protects you. As you have an order for £50,000 and an invoice for £50,000, you have no chance of losing out if the exchange rate moves against you. Of course, this could sometimes take a lot of negotiation!
- Netting – this is another method that was used a lot in the past by larger companies when operating overseas. If you owe an Australian supplier $10,000 Australian Dollars but have an Australian subsidiary company owed $11,000 Australian Dollars, then you can use this to your advantage by netting off your group currency flow. This means that there is only $1,000 Aussie Dollars at risk rather than the full $10,000. This would need to be happening with transactions that are going through at more or less the same time though, so it could be tricky.
- Matching – another traditional method that some businesses used to manage their currency was called matching. That works by using a supplier and someone your business owes money to that uses the same foreign currency. If you should be getting $1 million from a US based customer at the start of the month but then need to pay $750,000 to a US supplier in the middle of the same month, just open a US bank account. Have the $1 million your business is owed paid into that and then pay the $750,000 you owe from the same account later in the month. That means you only have $250,000 exposed to currency rate risk. Of course, it did mean you had to leave a lot of money sitting in the foreign account for weeks on end which was not always practical.
Currency management has moved on
Recent years have seen currency management for business move on from the above mentioned more traditional methods. Online money transfers have replaced the old-school banking ways of managing currency. This online change has been instigated by the internet boom and the way in which businesses can now look after their finances digitally.
But why has international money transfer via online companies become so popular? In many ways, it has given businesses an easier way to move money around with no banking fees and quicker transaction times. In terms of managing currency exchange risk, it also wins out. It has none of the above drawbacks but still allows companies to access the best exchange rates on any given day. Online money transfer sites also give a lot of information on the current exchange rates, so business can make the correct decision on when to send money or not.
Any sensible business owner will naturally want to compare international money transfer providers to find the ones with the best exchange rate on the day. Luckily, the internet makes this very simple to do.
Currency management is key for individuals too
Effective currency management is as vital for personal money transfers as it is for business. Although it may be on a much lower level, getting the best exchange rate you can when sending or receiving payments is essential. Once more, the modern online money transfer sites available are a fast, secure and simple way to do this yourself. Take the time to manage your currency for both business and personal use and you will not regret it.