Managing cash flow is something every small business has to do well. However, for those that do business overseas, this can be even more of a challenge. Here are 10 strategies worth implementing.
Have a Plan
First and foremost, no two companies are the same, so be sure to adapt this advice for your business' unique features. Find out what your cross-border payments are going to look like, both incoming and outgoing, and get to work immediately.
Use Foreign Currency Accounts
Every small business in your situation should be <a href="/personal-clients/personal-foreign-exchange/foreign-purchases.aspx" title=" Using Foreign Currency Accounts"> using foreign currency accounts</a> using foreign currency accounts. They will ensure you always have cash on demand in any currency you need. Furthermore, you don't have to worry about multiple cross-currency transfers which can be a huge burden.
Spot Payments
When you use a spot payment, you're buying or selling currency at whatever the rate currently is. Spot rates are great for smaller amounts or when currency has to be exchanged right away. Find a provider that charges low fees and gives you a competitive spread between the buying and selling rates.
Use Forward Contracts to Hedge
With a forward contract, you buy a set amount of currency with the understanding that there will be a settlement sometime in the future for a predetermined rate. This is perfect for keeping to a budget and hedging against fluctuations in the market. If you fix prices in advance, your small business can easily plan ahead.
Currency Options
Much like with a forward contract, your small business can rely on a set exchange rate at a certain amount and by a certain date. However, as the name would suggest, you don't actually have to exercise that option. While this kind of flexibility costs a premium, most would agree it's worth it.
Online Transfers
Online transfers make it easy to manage your cash and put visibility on all payments. You'll also have an easier time with handling invoices with vendors that are overseas.
Use Software for Budgeting
Setting and keeping to a budget is vital. Some providers offer products that can figure out your total currency exposure across a number of invoices. This makes it easier to make informed decisions based on the current market rate for the currencies you use.
Invest in a Limit Order
With limit orders, you purchase a currency as soon as it hits a predetermined rate. This is extremely effective for small businesses that have a little flexibility available to them before they need to pay.
Pay with Local Currencies
Vendors located overseas usually give themselves some wiggle room in their invoices to hedge against currency risk. In fact, some 20% of suppliers in China add about 4% to their invoices because of fluctuations with foreign currencies. If you use local currencies, then, it should be easier to negotiate a discount for your company.
Know When to Ignore Exchange Rates
This might seem like odd advice, but it's important. Once you have your plan and begin implementing it, there's no point in sitting around and constantly monitoring exchange rates. If you know which rate works for you, it will still be good for you no matter where it ends up going.
Be sure to take advantage of the 10 strategies outlined above for your small business. The sooner you begin putting them into place, the better.