How to Manage Foreign Currency Invoicing to Help Raise Margins
Foreign currency exposure is an unavoidable issue for any companies dealing with international clients. Greater administrative costs must be managed, and there is a need to identify and mitigate the potential for variable revenue and costs caused by exchange rate fluctuations. Failure to do so can materially affect the margin on any foreign sale, or price of any foreign purchase.
By invoicing the customer in a company’s home currency, a company forces the customer to assume currency risk and any associated costs. This may be preferable to the customer if they have revenue in the same currency, but this will not always be the case. Alternatively, the customer could be invoiced in their own currency. This shifts the exposure to the vendor, but can considerably improve the process for the customer.
It is also a regrettably known practice for some suppliers to claim an inferior exchange rate on invoices to foreign customers than the one they actually pay. For example, a company might use a published bank rate whilst actually using a more competitive currency broker. This hidden margin can be removed if both parties transact in the same currency.
Case Study 1
Business Issue: Foreign supplier invoicing in the buyer’s home currency
Objective: Reduce effective purchase price by having the supplier invoice in their own currency
Woodenshoes.com, a Canadian website operating in Canadian dollars, buys all its shoes from Clogs4U in the Netherlands, where the shoes are priced in Euros.
Clogs4U has always invoiced Woodenshoes.com in Canadian dollars ($), even though its products are priced in Euros (€). On the invoices, Clogs4U shows a Euro to Canadian dollar rate of 1.1.
On the latest invoice for €2m, Clogs4U sent Woodenshoes.com an invoice for $2.2m citing an exchange rate of 1.1 CAD to EUR. The 1.1 rate is the rate Clogs4U says its bank charges, but Clogs4U actually has access to a currency broker providing it 1.08. Therefore when Clogs4U receives the $2.2m, it actually pockets €2,037,038 - €37,038 more than its price tag.
Woodenshoes.com requested Clogs4U to resend the invoice in Euros. Clogs4U worked with a specialist currency broker to settle this invoice in Euros at the rate of 1.08 costing it only $2.16m, a saving of $40,000. After this saving, Woodenshoes.com requested Clogs4U to always send its invoices in Euros.
Case Study 2
Business Issue: Invoicing globally from one location
Objective: Manage and reduce currency risk and administrative costs, improve cash flow reporting
An international freight forwarding operation with a worldwide customer base needed to centralise their invoicing and payments operation, invoice customers in the local currency, and receive payments back in the company’s home currency. By working with a global invoicing service, the firm redesigned their processes so that all customer invoices were generated from their headquarters in the UK, while customers were able to pay their invoice into a local subsidiary bank account.
At the close of each business day, all customer payments are uploaded into the global firm’s main account in the UK. All receipts and payments made from local affiliate banks can be seen and accounted for in this system, providing increased visibility into all payment and funds activity.
The freight forwarding operation has access to an online system that provides crucial information on movements in the foreign exchange markets, as well as currency exchange specialists who are available 24 hours a day to help with customised hedging solutions to help reduce exposure to foreign exchange currency volatility.
Benefits of Managing Foreign Currency Invoicing
Foreign currency invoicing can benefit both sides of an international purchase order:
- Customer experience: The ability to invoice a customer in their own currency reduces their currency risk and transaction cost, making the vendor’s products more competitive.
- Vendor costs: Foreign currency invoicing allows a vendor to manage international income in a number of more cost-effective ways, for example by only exchanging when larger sums have accumulated, to allow a better exchange rate via a specialist broker, or holding and offsetting against local currency outgoings. Brokers can provide services by phone and online, to monitor all aspects of such arrangements.
- Low fees: Several invoicing service providers operate on a minimal fee or even a fee-free basis, depending on the amount of money being transferred. Foreign exchange brokers can also offer more competitive rates than a bank or payment processing site.
- Risk management: A wide range of online tools are provided by the service providers, to better allow customers to manage forex exposure. Such services include forex rate monitoring, access to live reports, conversion tools, economic forecasts, access to dedicated foreign currency exchange specialists, and invoicing automation and tracking systems tailored to a company’s needs.
Risks and issues of foreign currency invoicing
International transactions naturally expose companies to an element of currency risk through forex market volatility. A balance must be achieved by the selling party, between their own willingness to take this risk and the possibility of losing customers who are unwilling to shoulder this risk themselves, especially where a locally purchased option reduces the cost and bureaucracy of handling foreign currency.
Alternatively, moving the transaction into the customer’s local currency, with an appropriate invoicing system to allow payments to be received in the currency of the vendor’s choice, whilst invoicing in the customer’s currency, can help to mitigate both currency risk and conversion costs.
With a wide variety of service providers available for foreign currency invoicing, even the most sophisticated and widespread exchange and invoicing operations can be handled for most companies. It is crucial to identify a provider who can offer the right technical solutions to provide transparency and good quality reporting, as well as the safe and legal execution of global multi-currency transactions. Many of the providers listed on our site are able to offer these services.