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Making sense of Foreign Exchange

Editorial
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Finding the right foreign exchange provider for your manufacturing business can make a big difference to your bottom line, as well as reduce risk. With more manufacturers expanding internationally, what are the key areas to consider when choosing a provider and how does it impact your margins?

Are you being served?

In the past, making an international payment required phoning your local bank, obtaining a rate for the day, and then filling in a number of forms. It was a time consuming and often expensive process.

Today, Australia is one of the largest forex markets in the world, with growing sophistication and liquidity. Technological advances, combined with a more competitive and transparent financial industry, now offer a number of providers and methods for transacting international payments.

Manufacturers can take advantage by seeking professional advice on their forex needs, and that means getting the right service, as well as competitive rates.

“It’s your money, so it’s important you choose a provider who you can trust, and can quickly respond to any of your queries. You should look at the overall service package – not just competitive rates, but that their online system is secure, flexible and simple to use, and settlement is efficient and prompt,” said Barry Fletcher, General Manager, at American Express FX International Payments.

It’s important to have the discussion upfront with your provider on rates to understand where their costs come from. Ask what margin you are receiving (the difference between the cost to the provider and the rate charged), and any additional fees.

“Buyer beware exists in financial market products as much as in any other industry and the lowest rate does not equate to the best product,” Barry said.

“You do get what you pay for in terms of getting a broad set of solutions and a high degree of certainty. If you’re getting something at a bargain basement price, you have to ask yourself what you’re giving up.”

The provider should explain things clearly, provide plenty of information and ideally round-the-clock support in what is a 24-hour market.

Managing risk

The importance of managing risk is shown by the volatility in international currencies, which can have a direct impact on a company’s bottom line.

The Australian dollar has fluctuated around parity with the US dollar since October 2010, recently hitting lows around 86 cents after previously trading in excess of US$1.10. A company importing goods worth $100,000 and paying in US dollars would have seen a US$24,000 difference in costs at these two extremes.

When establishing a hedging strategy, a business needs to determine whether its costs are fixed or fluid, with the former giving greater opportunities to lock in rates in advance. For example, if a manufacturer has a fixed annual contract to supply, it knows how much it will need to import and the currency required, and could buy forex contracts to match its payments

“Hedging gives you a smoother cash flow as well as locking in the determined profit at the point of contract, which is very relevant to manufacturers who have an overseas interest. When you are dealing offshore, you probably need to know what price you will be receiving, given that delivery and payment are likely to be future dated. Currencies can fluctuate considerably and it’s essential to have the confidence that your risk is being managed, so you can focus on growing your business,” Barry said.

Securing your money

Part of the risk management process is the security of the transaction. While a good rate and low fees can be pleasing, the provider still needs to offer online security and full traceability on your funds.

Being able to make and receive payments quickly and easily is especially crucial for time-poor and cash-flow conscious business owners. This is where the flexibility of a knowledgeable expert is invaluable; to discuss forex strategies with you on the phone or via email. It’s personalised service as opposed to a nameless online entity.

Trading across borders has become part and parcel of modern business for manufacturers, and without the right systems in place it can have a major impact on cash flow and profitability.

By choosing the right provider with excellent customer service and competitive rates, transparent processes and efficient and secure systems, it can be possible to save both time and money, as well as avoiding any sleepless nights over volatile currency markets.

Click here to find out more about American Express Foreign Exchange Services.

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