Dollar days: Your foreign currency exposure

28th January, 2016

In June 2011, the Australian dollar peaked at $1.10 against the US dollar. Recently, it has sunk to around 0.70 cents. Even if you think your business is not exposed to exchange rate fluctuations, I say think again. Now may be the time to rethink how you manage your foreign currency exposure.

I don’t have a foreign currency exposure

Let’s start with the types of purchases you make for your business.

Do you purchase stock from China or any other overseas country? Even if the overseas supplier’s invoice is in Australian dollars (AUD) you still have a foreign currency exposure.

If you are paying in AUD, the price your supplier receives will fluctuate against their own currency, so your purchase price is most likely to change once there has been a small shift in the AUD value. This could work in your favour; however, it may also impact your profit if the AUD increases back to 2011 levels.

Look under the mat

There may be a hidden foreign currency exposure in your business that you haven’t thought of. For example with the recent decline in the AUD, this will increase the cost of imported goods.

If you are an importer you will know this, but the decline in the value of AUD also means that locally produced goods will not be impacted by the change in exchange rate and therefore may become more competitive in your market.

Maybe, maybe not…

Perhaps you are looking at quoting or preparing a tender for an overseas purchaser and they want the quote or tender in their own currency. You find out two months later you were successful. The value of the foreign currency could move against you in that time, and the transaction may not be profitable — or even worse you make a loss.

Take immediate action

Once you know you have a foreign currency exposure, you need to take action immediately. Minimising this risk is only effective if you take action when the exposure is created (at the time of the purchase, for example). The value of the AUD can move enough in a week to impact your profits.

Minimise the risk

Unless you are a foreign currency trader, your foreign exchange risks should be managed in a way that allows you to focus on your business, without exposing it to unnecessary risks. Some suggestions include:

  • If you are receiving and paying out in a foreign currency, ask your bank to set up a bank account for you in that currency. This will minimise the risk, but any time you swap the foreign currency back to AUD, then there will be either some gain or loss.
  • Speak to your bank or accountant to explore the best way to manage your foreign currency exposure. For example, where you are preparing a quote in a foreign currency, you may be able to include a condition based on currency fluctuations.

If you really want to play Russian roulette on currency movements, you might be better suited to work for a bank!