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Thursday
Jul092009

Small companies lose out on forex risks

Small businesses trading in more than one currency don’t have the skills to manage foreign exchange risks and fail to understand how currency fluctuations affect their profits.

A survey of 500 finance directors at small companies showed 30% had no understanding of how exchange rate movements affected their bottom line according to currency broker Moneycorp.

In a year when Sterling has plunged and then recovered sharply against the US Dollar and Euro, lots of companies will have to calculate how these swings have affected accounting procedures.

Trading in foreign companies can expose a business to risks – like after agreeing a price for exported or imported goods the exchange rate changes before delivery.

If possible, try and make the contract in Sterling because this shifts the exchange risk to the trading partner. However, any ability to do this will depend on a firm’s relationship with the trading partner.

Unforeseen risk can include a competitor sourcing raw materials form a country where the exchange rate is favourable against Sterling that enables them to reduce costs.

Business transactions in foreign currencies will have an effect a firm’s normal accountancy procedures since foreign currency payments and deposits need converting in to Sterling.

Generally, when accounting for foreign currency transactions, when converting the amount in Sterling, the exchange rate that day has to be applied to the transaction.

Any foreign currency held, as well as any amounts of currency owed or are owed, should be converted into Sterling using the rate in force on the date of the balance sheet.

Gains or losses as a result of foreign currency transactions should be included in the profit and loss account.

Holding assets in a foreign currency will impact on the balance sheet since exchange rate movements may make their value differ from year to year.

Moneycorp said 40% of importers and 45% of exporters surveyed did not take any steps to protect against exposure to currency risk.

Mark Deans, dealing manager at Moneycorp, said: “When trading overseas, the priority for businesses of all sizes should be to protect against currency risk.”

 



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  • Response
    Response: forex in Indonesia
    Actually, the risk of forex could be minimize if we can makes some strategy when we would start it, join another forum or gather frome somes community which has a topic about forex will fully help.
  • Response

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