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How to reduce forex risk in an increasingly global marketplace

Small and midsize businesses looking to grow in the global marketplace need to do more than manage foreign exchange risk. To thrive, they must strategically address the challenge and proactively navigate the changing global payments landscape.



In an increasingly global marketplace, companies of all sizes find themselves navigating both the opportunities and the challenges of doing business across borders. But for small and midsize companies, the challenges are oftentimes foreign territory—which makes for a steep learning curve.

A recent Deloitte survey identified foreign exchange volatility as the biggest strategic challenge facing businesses today. What can start as a relatively simple accommodation for vendors or a can’t-miss new market can quickly cause crippling issues if smaller companies underestimate the potential forex risks.

Calculating forex risks for small businesses

Exchange rate fluctuations affect a company’s obligations when making or receiving payments in foreign currency and add a degree of difficulty for businesses of every size. McKinsey projects global payment revenue to increase at a rate of five percent annually over the next few years. As a result, the payment revenue share of overall global banking revenue is expected to decline to 31 percent by 2020, which is roughly equal to the contribution level in 2010.

For small and midsize businesses building a global payment strategy, it’s critical to understand the operational costs of taking on conversion efforts in contrast to what they might save by negotiating exchange rates through their banks. For most, establishing foreign accounts and maintaining proper governance may not be the best option.

While large organizations have in-house treasury functions that manage accounts, trade currency and facilitate banking relationships, this approach isn’t always feasible or cost-effective for fast-growing businesses. Senior finance leaders may find themselves being pulled deep into the weeds of transactional day-to-day forex management, reducing the time they’re able to spend on critical strategic and analytical responsibilities.

Still, functioning in a global marketplace requires companies to understand the local economy, as well as customer and supplier preferences. Typically, subsidiaries need to be funded so that they can make payments in local currency. While some markets with highly regulated currencies (China or Malaysia, for example) may prefer paying in U.S. dollars, enabling customers to pay in their native currency significantly reduces the complexity of bank wires or exchange fees on the customers’ end. In fact, according to our own extensive research, 49 percent of suppliers choose to be paid in their local currencies.

Scaling requires streamlined processes

For small and midsize businesses, efficiency is key. To ensure compliance with differing local regulations, it’s essential to establish streamlined processes—especially when paying suppliers or employees and accepting customer payments. But with more than 26,000 rules for making cross-border payments, enabling payment methods such as Global ACH, PayPal, and wire transfers can be time-consuming and prone to error.

Beyond different payment regulations and bank forms, privacy and data security rules also vary. Failure to keep up with evolving standards for capturing, managing, and storing data can put both businesses and payees at risk.

Streamlined processes are also needed for companies to prevent fraud and comply with local tax requirements. Companies without diligent onboarding and verification processes for detecting fraud and ensuring compliance with Foreign Account Tax Compliance Act provisions make themselves targets for financial crimes as well as regulatory or tax penalties.

The ability to effectively scale international operations often comes down to resources. For smaller businesses undergoing rapid growth, staffing for manual forex processes is challenging. Many times, senior finance leaders must carve out time to manage this work process themselves because the transactions involve sensitive financial information. While this function is highly important, transferring funds does not optimize a CFO, controller, or VP of finance’s time or skill set. For most businesses expanding internationally, streamlining global payments is a make-or-break priority.

Small and midsize businesses must implement strategies that reduce foreign exchange risks. (Photo by DepositPhotos)

3 steps to reducing forex risks

Operating in multiple markets continues to become more of a business need than choice. Because of this, small and midsize businesses must implement strategies that reduce foreign exchange risks and increase their operational efficiencies.

1. Ensure awareness, then compliance.

The cost of not knowing local laws, regulations, and reporting requirements can be catastrophic. While banks have traditionally borne the brunt of fines for forex irregularities, McKinsey reports recent initiatives, such as PSD2 regulations in Europe and open banking in the U.K., put more responsibility and regulatory pressures on nonbank firms. To keep up with local market regulations, it’s important to invest in tools that facilitate compliance and hire people who specialize in those areas.

2. Centralize cash management.

Managing and forecasting cash flow is often fragmented for smaller businesses. In addition, manual processes tie up resources and can lead to errors. By centralizing the cash management system, businesses gain a comprehensive view of cash movements and the company’s exposure. A central system also provides valuable oversight of requirements, which can help cut down on costly mistakes such as funds denominated in the wrong currency.

3. Adopt automation.

It’s not just about reducing payment friction. As businesses scale globally, the ultimate objective is payment processes that are no longer an operational pain point at all. Specialized technology, integrated within centralized enterprise resource planning systems, can provide a company with a single real-time view of cash flow that automatically incorporates different systems, currencies, and local market conditions. Investing in these types of platforms helps small businesses manage different payment methods and lets them reduce business risk and financial costs.

Small and midsize businesses looking to grow in the global marketplace need to do more than manage forex risk. To succeed and even thrive, companies must strategically address the challenge and proactively navigate the changing landscape.

(Featured image by DepositPhotos)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Chen Amit is the co-founder and CEO of Tipalti, a payment automation software that helps businesses manage their entire supplier payments operations by streamlining all phases of the AP and payment management workflow in one holistic cloud platform. Formerly the CEO of Atrica and Verix, Chen is a veteran high tech executive and repeat entrepreneur.