Approaching a new financial year, business owners become tied up in balancing the previous year’s numbers, manage inventory and get rid of old stock. Here Forex expert Justin Logan offers tips for managing international payments this financial year
This may inadvertently prevent you from preparing for the year ahead, and in some instances can put businesses on the back foot when the new financial year kicks in. It’s particularly important to assess your international payment strategies at this time of year. With the Aussie dollar dropping more than five per cent in May, how would your business be affected if your overseas contracts become five per cent more expensive?
To put in place realistic plans for the next financial year it’s important to learn from what happened during the previous year. But it can be difficult to step back and consider the impact of foreign exchange on your business and plan to manage that. Setting aside some time to do this, however, may be worth its weight in gold. And the reality is that this does not have to be an onerous task. Here is a three-step guide to help ensure that you have a grip on your international payments for the coming financial year.
Step 1: Understand what payments you’ll need to make next financial year: Like every business, cash flow is your lifeblood. When incoming funds don’t match up with outgoing funds businesses suffer, but forecasting cash flow can be a time consuming challenge. The first step towards taking control of how international payments influence your cash flow is to document your payment schedule for the next 12 months, along with currency pairs. This is a great way to figure out ahead of time your currency exposures and when you anticipate making payments.
It doesn’t matter if you have to use a little bit of estimation when putting your schedule together, and it’s likely that parts of it will change throughout the year. Having at least a general overview of your upcoming payment schedule is the basis of preparing to manage how exchange rate volatility affects your profit margins, cash flow and most importantly your bottom line.
Step 2: What impact did currency fluctuations have on you this year? In business it’s easy to become fixated on the future. Where will I find new customers? How can I expand my business? But there’s plenty to learn from past experience, which can contribute to the success of your business. When it comes to your international payments, how much did the exchange rate rise and fall over the course of the year, and how did this affect your profit margins (tip: the Aussie to USD fluctuated some 10 per cent over the last year)? Have you had to vary your pricing structures to account for currency fluctuation, and how did your suppliers or clients react to this?
Once you’ve documented how exchange rates impacted your payments in the previous financial year, you can return to your upcoming payment schedule and consider some strategies to minimise the possibility of negative impacts from similar payment structures in the year ahead.
It’s impossible to predict currency movements; however there are a range of tools and strategies that can help you take control of currency risk, improve cash flow management and bring certainty to your business rather than simply riding out volatility. There are tools available to help businesses of all shapes and sizes. Some offer straightforward protection from fluctuation, and others are a little more complex, offering protection while also allowing you to participate in any positive market moves.
Step 3: Don’t rely on spreadsheets and note books: If you’re running an SME with international operations, you’re most likely time poor and the last thing you need is to be manually tracking foreign invoices. Does your current accounting platform record your international payments? How much detail does it offer? An accounting platform that provides you with clear and detailed reports on all of your international transactions will make preparing for each new financial year a much simpler task. If you really want to simplify your overseas payments, you need a platform that gives visibility into your future foreign exchange exposures and cash flow requirements. There are tools out there that can monitor currency exchange rates for you, and even provide holding balances so you can reduce the need to convert funds from your local currency before making a payment, every conversion adds in cost.
A little reflection goes a long way
For importers and exporters, the foreign exchange market is a major part of running a successful business. Managing the effects of foreign currencies calls for a little bit of reflection and some forward thinking, and the perfect time to do this is while closing out your numbers at the turn of financial year. Thee three steps outlined above will help put you in a position to simplify your cash flow management. But it is important not to forget that the best strategies for managing international payments are those which are reviewed at regular intervals and realigned with market movements as they change.
Justin Logan is Director of Client Relationship Management, Australia, Western Union Business Solutions.
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