With more and more local companies conducting business overseas, the global economy we live in is brought home to us. The phrase, global economy resonates throughout New England, one of the most intensive import/export regions of the United States. In fact, Rhode Island companies alone exported more than $1.2 billion in 1998, and that number is significantly higher for imports.
But while many local businesses assume they are capitalizing on overseas opportunities, some are actually placing themselves at a disadvantage.
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Although foreign exchange is seemingly shrouded in complexity and mystery, it need not be, especially since it can significantly affect a company’s bottom line. Even instances when companies complete foreign transactions in countries with fairly stable economies, modest currency swings can significantly disturb a company’s profitability if it has not taken steps to educate itself about currency risk.
Every New England company that does business overseas-whether a large, household name or a small business with only a single foreign customer or supplier-must deal with the issue of currency risk, even if conducting international business in U.S. dollars.
Because of fluctuations in the euro’s value and the lingering effects of last year’s Asian financial crisis, many area businesses are now choosing to actively implement foreign exchange strategies to protect themselves against the risk of unexpected currency movement. In fact, at BankBoston, an internal study showed that our 65 foreign exchange professionals traded four times as much currency in 1997 as in 1996, with 1998 and 1999 volumes higher yet.
There are many effective ways to handle foreign payments and to improve international business relationships. For example, two ways to enter the foreign exchange arena are through international wire transfers, a fast, safe and efficient way to send money internationally, and foreign drafts, checks drawn on foreign banks.
The following example illustrates the benefits of foreign exchange services.
Imagine a small business that needs to exchange funds into several different currencies to pay invoices in those countries. If the dollar is likely to drop against those currencies near-term, the company should consider making the exchange immediately to guarantee the conversion rate. But if the dollar is likely to rise, the company may want to wait to see whether it can get a more favorable rate of exchange.
Foreign exchange tactics and tools help businesses analyze where a currency currently stands, how the dollar’s value might fluctuate as a result of world events, and whether related information has already been discounted by the market or is likely to change the dollar’s value. Obviously, timeliness and accuracy are critical factors in this decision-making process.
Smaller companies, in particular, can gain greater control over their international business transactions if they incorporate such basic strategies into their foreign business dealings. The following example illustrates some of the issues.
An area flower importer regularly purchased flowers from a Dutch bulb grower, and the importer was paying in dollars. Analysis of the importer’s situation, however, revealed that the Dutch vendor was –unknown to the New England business–“loading” them by adding a hefty mark-up to invoices.
The reason? The Dutch company was protecting itself from the risk that the dollar would decline in value between the time the New England company placed its order and the time the order was fulfilled and paid. The solution? The New England company decided to negotiate in local currency and ultimately to deal in it through wire transfers to eliminate these mark-ups. By making this change in its currency transaction, the New England importer was able to positively impact its bottom line.
A company working with foreign vendors can’t afford to overlook foreign exchange services strategies. If you are wondering whether your business needs to explore foreign exchange solutions, ask yourself these questions: Is it easy and convenient for your business to convert to and from international payments and collections when necessary? Do you have up-to-date foreign market information? Are you competitive with others in
your industry in terms of international pricing and execution?
As a business owner conducting transactions overseas, consider this: If you were taking a vacation abroad, you would very likely convert your U.S. dollars into the currency of the nation you were planning to visit.
This levels the playing field for you as a tourist in a foreign land. Doesn’t your business deserve the same opportunity?
(Keith Cheveralls, managing director of Global Foreign Exchange for BankBoston, manages the risks associated with the bank’s North American customer franchise, and is responsible for directing the group’s foreign exchange activities.)
