December 1, 2009

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Article

Charting an International Course

Foreign Exchange Business Strategies

By Ryan Gibbons

December 1, 2009

Each day, I work with companies that brave the preverbal high seas and conduct business on an international scale. Whether you are already engaged in business around the globe or are thinking about expanding your market share, you should carefully consider the effects of the currency markets and how a good foreign exchange (FX) strategy can help your business mitigate some of its global risks. Those with international business experience know that going global isn’t as simple as selling your product in another country. Business owners and their finance specialists need to carefully evaluate what currency to invoice in, when to repatriate funds and how to mitigate some of the financial risks of doing business overseas. Global corporations are more influenced by foreign exchange rates than one might think. The rates can have significant impact on the firm’s finances, especially when not managed properly. With today’s choppy economic conditions, some businesses are focusing more of their approach to corporate governance and managing their risk. Although there is light on the horizon, the current economy is leaving many feeling a bit seasick, and more than a few businesses are re-evaluating their global strategies when it comes to foreign exchange. The businesses that have adopted a constant risk management plan, when it comes to foreign currencies, have faired much better than those without a plan. When thinking about foreign exchange strategies, I recommend businesses look at it as a risk management function and not merely an operations function. The key reason to focus on risk management is to protect and maximize profitability. When businesses simply look at FX as an operations function, often international transactions get treated by the accounts payable or accounts receivables department as just another payment that needs to be processed. This is dangerous because the foreign currency markets are volatile and if exposure is not actively managed, it can have a negative consequence on the firm. For example, consider the payment of a $500,000 euro invoice. The average weekly market volatility in September for the EUR/USD pair was 8 percent. That means the USD equivalent of that invoice payment may have fluctuated by nearly $60,000. That kind of fluctuation demonstrates the need to approach foreign exchange from a risk management perceptive. Corporate foreign exchange is a niche skill within the corporate finance department. Executives should realize it is acceptable to not understand the finer points of FX markets and that it is wise to ask for help in effectively managing it. Here are some suggestions: • Find a foreign exchange expert and develop a strong relationship with him or her. • Lean on your expert to guide you through the risks of doing business internationally. • Ask your expert questions and involve him or her in your business. • Discuss what currency is best when invoicing in a particular country and recognize the benefits and how they will impact your sales and bottom line. • Ask how and when to pay for international expenses. • Ask how to effectively streamline all FX information and spreadsheets within your finance department. When evaluating FX strategies and solutions offered by outside financial institutions, be wary of those providers who primarily tie their value proposition to an online platform. Many of the sound practices in a good FX strategy have been overpowered by the rise of the Internet. Financial institutions have pushed convenience. This has allowed them to cut expenses and turn what was once a thought process into a point-and-click operational mentality. Coincidentally, it has also allowed for higher margins. What is missing from this approach is the strategic counsel and advice that should be taken when dealing with each international transaction. Finance executives should recognize that price and convenience carries little weight when compared to the money saved by a good FX strategy. Consulting with a foreign exchange expert who can guide them through the process to identify all the risks associated with the transactions is truly invaluable. In conclusion, if you are with a company conducting business internationally, or considering global expansion, you need to fully understand how foreign exchange can impact your business and the risks associated with it. Seek out a financial services provider who has your best interest in mind and can help you navigate through potentially rough waters to help you get where you really want to be. Ryan Gibbons is a managing partner and founding member of GPS Capital Markets, Inc. (www.gpsfx.com). He brings more than 20 years of experience in various facets of international banking such as transaction structuring, yield and price management, international payment flows and sales team management. He can be reached at 800-459-8181 or via email at rgibbons@gpsfx.com.
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