How Do Currency Exchange Rates Affect Your Business?
There is a common belief that currency exchange rates only matter to bankers or speculators or major importers, but this is completely wrong because it affects all kinds of businesses.
For example, you can take a look at the negotiations of Britain's exit from the European Union as a model for the intercontinental influence of currencies after the British pound fell against the Euro, which in turns affected companies outside Europe and countries thousands of kilometers away from London.
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Therefore, the currencies risks on business activities are not local anymore, but it became intercontinental as you can incur losses or your profits decline suddenly due to currency fluctuations in a country within a continent other than yours.
What Are the Risks & Who Does It Affect?
The change in currency exchange rates is characterized by the risk of a relative change in the value of currencies which can directly affect revenues, expenses, cash, and profits.
Risks of Currency Exchange Rates Affect:
Local Business Activities
If you run a local business activity in Jordan for example and all your products and services are locally made, all your customers are local and you earn your money in local currency, you are safe in this case and will not be greatly affected by any fluctuations in currency exchange rates.
But if you earn your profits in foreign currencies or import materials in hard currency or any other transactions that include foreign currencies, in this case you will be effectively and directly affected by price fluctuations in foreign currencies.
Importers and Exporters
If you have a business activity in Jordan, but all your products are assembled and manufactured in Japan for example and you pay production costs in the Japanese Yen, then any change in the exchange rate of the Japanese Yen will immediately and directly affect your profits and losses.
But if you export some products to countries like Gulf countries and JoD fells against the local currency, this can make a margin of profits for you because of the difference in the exchange rate, but if JoD increases significantly against the local currency, you will incur losses as much as the difference in the exchange rate.
There are multinational companies that have headquarters in mother countries but they are working in several countries, so they can deal with more than one continent in many currencies like USD, EUR, YEN and others, thus they can be affected by more than one currency at the same time, so they have to calculate risks properly.
Methods and Mechanisms to Avoid Risks
You should evaluate risks related to fluctuations of currency exchange rates and try to avoid them and mitigate their effects through a number of methods and mechanisms:
- An internal management department called "Risks Management" should be established and introduced to analyze potential risks and develop appropriate plans to address them.
- Convert all expenses to the most stable currency, whether it is local or foreign, to ensure the lowest margin of risk.
- In case that any sudden change occurs in exchange rate and it negatively affects your budget, you can raise the price of your service with the same percentage to compensate your losses immediately and directly, but also avoid losing your customers or their satisfaction; this step should be calculated very well.
- Determine the main process whether it is a foreign or local one and subsidiary currencies and set a margin for change during the next year by studying the market and official banking data in the country in which you work or by accurate analyzes of the market activity and other factors that should be put into consideration, and include these numbers in the budget.
- If you are a pure local company but sometimes deal in hard currency like paying salaries or importing costs or others, then you have to include a margin of losses in anticipation of any change in exchange rate.