Small business owners encounter numerous financial challenges in the volatile market conditions. One of the greatest concerns for every entrepreneur is the risk of sudden changes in currency exchange rates. Those working with only one currency are exposed to a lower risk, at least in theory. As opposed to that, international small businesses juggling different currencies run higher risks of losing assets due to moving exchange rates. No matter what group your business belongs to, you need to learn more about preventing undesired effects of these movements.
In this article, we’ll first discuss the most common issues with currency exchange rates for small businesses. After that, we’ll show you how to deal with the problems that could affect your revenues. Finally, you’ll see what you can do to keep it safe in case of a sudden drops/rises of those rates.
Exporting vs. importing goods
Naturally, in a case of strong variations on the currency market, your revenues will be affected mostly via importing and exporting goods.
Let’s say that your small business is based in Germany and uses Euro as its base currency. Also, you buy all the raw materials you need for your production there. If you sell your products or services only in Germany and on the territory of the EU, you won’t be significantly struck by altered currency exchange rates.
However, if your market is within the territory of your base currency, but you import raw materials from countries with different currencies, you’ll feel those changes to a greater extent. For instance, if you import coal from Poland and the Polish Zloty drops, your business will profit. As opposed to that, an increase in the value of Zloty will cost you more, which will result in lower revenues.
A different case is when you manufacture products in the area of one currency and export them to a different one. For example, if your Germany-based business exports goods to the UK, you’ll depend on the currency exchange rates between the pound and the Euro. These changes are even more important in light of Brexit and its impact on the economy.
In this situation, using the coal produced in Poland to manufacture goods in Germany and export them to the UK adds to the interdependence of markets, currencies and your revenues. Such small businesses will need to pay special attention to the changes in the currency market.
International workforce and their payments
Apart from importing/exporting raw materials and products, small business owners also need to take care of the third variable in this currency formula – the workforce. Since the number of online workers is growing at galloping speed, both entrepreneurs and employees make significant profits working via the Internet. That is if the currency exchange rates don’t change overnight.
Setting the payments
If you’ve already made an effort to hire employees via the Web, learn more about their national currencies, as well as about their living costs.
For starters, using the Numbeo website will help you set the payments for your employees in various countries.
What comes next is deciding how you’ll calculate and pay that income. For example, the aforementioned small business from Germany will make their payments in Euros. However, if you collaborate with a digital agency from Prague, you can either make that payment in Euros or in Czech Koruna.
Transferring money
The easiest way for you to pay them would be using Euros. You can transfer money to your business partners’ accounts via PayPal, Payoneer or any other payment solution. They’ll withdraw their payments either in Euro or in Koruna. Their decision will depend on the local withdrawal regulations and exchange rates.
Also, there’s the issue of paying local taxes. While you’ll have to deal with VAT, your employees and providers will have to study their local tax duties. Here, the best option for you is to pay your workers their gross payment. After that, they can sort out their taxes with their tax authorities.
Adjusting to exchange rates
What’s problematic here is how to manage those payments in case the exchange rate of Koruna changes. It’s crucial to set the rules for such a situation in advance. On the one hand, you can accept to adjust the payment in Euros, to follow the movement of your employees’ local currency and inflation.
On the other, you can stick with the pre-set payment in Euros. You won’t make any changes, regardless of the behavior of their local currency.
What solution you’ll opt for here depends on your agreement with your employees. Once you’ve reached an agreement, hold on to it. Even if their local currency drops significantly, don’t change the currency payment contract. Still, you can make up for the financial gap through bonuses and similar rewards.
Reducing the impact of altered exchange rates
As you can see, products, assets, materials, and manpower can all move without any boundaries in this global village. However, they’re all affected by currency exchange rates. So, you need to hedge your profits from those changes and dampen down their impact. In order to do that, you should apply some simple strategies for keeping your revenues intact.
- Lowering the production costs – Buying raw materials and setting prices in one currency, while selling in a different one is a risky way of managing your business. If possible, move your production to a market where both manpower and raw materials are less expensive. That way you’ll manage to offset any larger turmoil on the currency market with lower overhead expenses and payments.
- Increasing the prices – If the changes of currency exchange rates still catch you by surprise, it’s vital for your business to react promptly and retain your revenues. Here’s where increasing the prices saves the day. Frankly, you’d forward those market changes onto your customers. However, some of them might find that inconvenient, so you’re running the risk of losing some of your buyers. Therefore, this move has to be gentle but swift. For instance, you can retain the old prices for the existing products, but raise them for the new ones, as suggested by the Wall Street guide on raising prices without losing clients.
- Analyzing the business reports – You can predict some future trends on the basis of past business events. In order to obtain input to do that, analyze your business reports from the closest past periods. Follow the changes in your domestic currency, as well as of those in the countries from which you recruit your raw materials or your employees. Analyzing these reports will help you bring decisions to protect your revenues from untamed exchange rates.
“Freezing” the exchange rates
Small business owners who aren’t willing to get into the matter of various currencies and altered exchange rates can “freeze” the exchange rates. Namely, when you’re signing a contract with a business partner, you can add a special section that defines the payment terms. This paragraph should contain a straightforward statement that specifies a forward exchange rate.
This means that you’ll pay the same amount of the target currency, no matter when the payment is made. Let’s say that you need to pay €30,000 to your provider of raw materials. You’ll make an agreement that you’ll apply the exchange rate valid on the date on which the contract was concluded.
As a result, both parties will protect themselves from losing money due to unexpected changes in the exchange rates.
Conclusion
You’ll manage to run your business more efficiently if you adapt to the ongoing changes pertaining to currency exchange rates. On the one hand, you can go for some big moves, such as relocating to another country. On the other, there are simpler ones, like signing forward contracts.
No matter what changes happen around you, always go for the solutions you understand. That way, you’ll minimize the risks caused by the movements of currency exchange rates and keep your business rolling in the desired way.
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