Opening an International Office: Currency Risk Management
By Andrea Barnes
The time has come for your company to expand its international presence and open an office overseas. International expansion can be an exciting prospect for a company, allowing your business development team to reach a larger audience and helping further develop brand recognition of your company. For companies that already sell their goods or services overseas, and international office can help further establish them within a business community and allow easier management of overseas customers and clients. Though there are many exciting opportunities involved with opening an office overseas, its important to make sure the process is thoroughly planned and executed, particularly when it comes to financials.
A Bigger Business Means Bigger Risk
While opening an international office is an exciting prospect, your day-to-day activities will now involve financial transactions that expose your business to currency risk. Small to medium sized enterprises that conduct business internationally are likely already familiar with the financial processes of importing goods and international invoicing and the currency risk involved with them, but running an international office will include an entirely new series of international payments.
As all currency is volatile, it can be challenging to predict what the exact value of either your home currency or the currency used in the country where your initial office is located will be at any given time.
Whether you decide to rent or buy an office, you will be required to send either a downpayment or a security deposit and first month’s rent or mortgage payment. Unlike your company’s previous domestic financial obligations, international payments require more steps by your bank. The bank must exchange your base currency for the foreign country’s currency in order to process the payment. Because of this, international money transfers can be unnecessarily costly, and it is important to take into account how fees and exchange rates might impact your bottom line, as it is a cost that is often missed during expansion planning.
After your initial downpayment or security deposit for your international property, you will have monthly rent or mortgage payments due. In addition to office costs, you will likely have vendors that you hire overseas for upkeep of the property. For example, janitorial services, catering services and even simple services like office supplies or regular bottled water delivery will need to be paid in the home currency of the international office. Any overseas employees will also need to be paid in home currency, adding to the list of regular international payments that will be made.
Because your company will now have new, regular international payments, it is advisable to look into setting automated payments up that can be directly drawn from your account. Though this service is offered by many banks, alternatives such as working with a currency specialist can help your company navigate this process more easily.
Managing Foreign Currency Risk
Currency exposure can be a daunting aspect of business expansion. Financial uncertainty can make many companies hesitant to expand internationally. Though companies should always take into account the financial risks of any large business decisions, it is important to remember that there are a variety of financial methods and tools available to SMEs to help them better plan for and manage currency risk.
For example, if you happen to notice that the exchange rate between your international office’s currency and your company’s home currency is favorable, you should look into something called a currency forward or forward contract. A forward is an independent agreement between two parties that effectively locks in the exchange rate of two currencies for a sale at a future date. The prices of forwards increase depending on the length of a forward contract, due to a variety of factors such as interest and the overall economic stability of a country. While it is possible that on the date of the agreed purchase, perhaps 6 months from now, that the exchange rate will be even more favorable, a forward contract gives your company the ability to plan and budget ahead. You already know exactly how much you will be spending on your payments in the following months.
This is a particularly popular way to hedge currency risk amongst companies that are aware of monthly international payments. For example, a company with a monthly rent payment in a foreign office may notice over the months that the actual amount spent on rent changes each month depending on the exchange rate. This company could take out a series of forward contracts over several months, with each contract’s date occurring shortly before their rent is due. By doing this, the company can anticipate exactly how much their rental payment will cost each month.
Navigate International Payments with a Currency Specialist
Companies expanding internationally could benefit from a currency specialist that focuses specifically on international payments. A Currency Specialist can assist your financial decision making team with the many different types of international payments that will now be required of your company, from monthly rent payments to vendor costs to international payroll. A currency specialist can even assist those companies that were already invoicing and exporting goods internationally with these processes, allowing all international financial transactions to be managed by the same specialist with one business account. Many business owners prefer this to working with banks, where SMEs are less likely to be a high priority. Explore currency specialists today with FXcompared’s Comparison Tool.
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