By Manoj Patel
In the current global trade, there are certainly no geographical boundaries. After all, every business ultimately wants to expand its operations across the globe. So, while focusing on the opportunities and other important aspects of business expansion, ensuring smooth foreign exchange transactions is a must.
The main roadblocks for a successful overseas business operation are lack of awareness and constant fluctuations in the currency values. A proper consultation on foreign exchange management techniques can be very helpful to ensure the business is on the tracks. Here are a few steps that may lead an enterprise that way.
Approach a bank suitable for your business
This is the foremost step in bringing your Forex management on track. While many banks do offer similar services, it is always the best practice to compare the rates with the mid-market rate – the true exchange rate – which is easily available on the internet.
Next is the commission fee. Never get deceived by the commission fee charged by banks. Though many banks offer a 0% fee, it is not practical and one should understand that the fee may be in some other hidden form in such cases.
Although usually, you can find that the banks operating online and having a transparent rate sheet are trustworthy, as they do not try to manipulate the customers.
Focus on the Forex provider
While there are many Forex providers offering a myriad of services, one should be careful in choosing them in according with the nature of their business transactions.
For example, it would not be so beneficial to choose a Forex provider having better price, but supporting only few currencies if your Forex transactions are from all round the globe.
One can even go for a custom service bundle from the Forex providers, which can be done by issuing a request for proposal inviting providers to bid for you. This can be suitable for businesses diversified in nature, and is also beneficial.
Know where your money is going
Focus on the below factors to have a fair idea on what you are paying for:
a. Dumping: This is a most commonly used deceptive technique in the Forex market where they lure customers initially by offering unimaginably low rates and then they start charging additional costs on future transactions without any intimation.
b. Selective Exchange Rate Adjustment: It is obvious for the service providers (banks, FX providers) to find opportunities to benefit from the market conditions, but transfer the potential losses to the customers. In the highly volatile foreign exchange market with the exchange rates updating almost constantly, there will be cases where the updated exchange rate can either benefit the bank from the agreed exchange rate, and in some cases, can also be a loss factor for them. Though the profits are not intimated or passes to the customer, the loss scenarios are surely done.
c. Spread: Spread is the difference between the exchange rate offered by the bank and the real exchange rate or the mid-market rate. Thanks to the continuously upgrading technology, now the mid-market rates are easily available to everyone on the internet, which was not used to be the case earlier.
Hence, it is not easy now-a-days for the banks of the brokers to take advantage of the spread.
Maintain an account in main currency
Main currency is usually the currency in which majority of the transactions occur. In many ways it is beneficial to maintain an account in the main currency.
With most of the transactions occurring in main currency, this account prevents loss in the form of spread and protects the firm’s revenue from the volatile currency exchange rates. Also, one can always go for taking credit in the main currency by maintaining a bank account operating in that currency. This also saves a lot of time by avoiding unnecessary intermediary steps like currency conversion and transfer.
Usually USD being prominent and stable currency in the international market, businesses use it as main currency.
Know better about the currencies
The focus on the international transactions should be on saving as much as you can from the charges like spread. Hence, major currencies are always a better bet. These major currencies like USD, EUR, and GBP are traded in mass and have high liquidity with low spread.
Though not in all the cases a business can operate on major currencies. In such cases, it is a must to have a fair knowledge about the currencies and understand its background in terms of volatility, liquidity. Also note that the country’s political and economical conditions do affect the trading of the currency.
‘Human error inevitable’, but it has no place in business
While the market conditions play a major role in the success of a business, it’s the human management that keeps the business from falling apart from within. While following all the above tips business should also ensure that there is place for human error in its operations. And this applies to Forex management also.
Common but harmful errors like paying in wrong currency, choosing a wrong bank, wasting lot of resources on currency translations etc. cost heavily to the business. These can be avoided by following few simple but effective techniques like “four-eyes” principle, “conflict of duty” management, and approval workflows. Technology is the best friend to business always.
Risk is inevitable, but can be covered
Business is always prone to financial risks. International trade is no exception. Highly volatile foreign exchange rates demand for hedging of the same. Hedging is a process of minimising risk by using financial instruments like future, forwards, options and swaps.
Hedging is one compulsory aspect to maintain financial health of the business. At the same time, one should be cautious with the market gambling during investing the firm’s money in the financial markets. Human error like choosing wrong portfolio can lead the business into irrecoverable losses.
Keep your Forex product purchases simple
With a plethora of structured Forex products available in the market, MSMEs often end up purchasing a complex Forex product irrespective of their need for it. Multi-featured complex structured Forex products might be attractive, but business should always understand their need and go for a simple one. This saves a lot of expenditure on Forex product purchases.
The UK Parliamentary Commission for Banking Standards report mentions that MSMEs are often lured to purchase complex Forex instruments even if they do not require. Lack of proper understanding of the financial instruments by the business is also a reason.
Hire a personal consultant with good expertise
Financial markets are not so easy to understand. Despite how many tips you follow, there is always a chance of things turning out to be a nightmare, which a business cannot afford for.
The perfect solution is to hire a financial expert having a global reach and broad knowledge on the global pairs from India who has periodic global knowledge and excellent hedging exercise. Selecting a right consultant can reduce the Forex management efforts by a greater extent.