What are the effects of foreign exchange on businesses?

What is foreign exchange?

Foreign exchange is the act of exchanging one currency for another, but these currency values tend to differ from one another, depending on the country.

For businesses, this is often the case when purchasing or investing in something overseas, as the money will be converted into the native currency for the transaction. While international growth can offer new opportunities, it certainly comes with risks.

The Forex Exchange Market: Where does it get more difficult?

The foreign exchange market is constantly shifting and changing, with currencies rising and falling depending on a number of external factors.

This means that prices cannot be pinned to one value for businesses buying abroad, and they can end up paying more or less depending on the exchange rate at the time of purchase.

For example, if you’re exporting products or services and are receiving funds in a foreign currency, you may lose out on money if the pound gets stronger. On the other hand, your supplier costs may increase if the pound gets weaker.

What factors effect foreign exchange markets?

The value of any currency is typically determined by various market forces based on trade, investment, tourism and politics.

Fluctuating interest rates can have an effect on the market. Higher rates create more opportunities for profit growth and help to increase the price of the currency. If rates are decreased, this means the currency is considered less valuable.

Economic stability is also an important factor – stable economies provide a perceived low risk and therefore attract foreign investment. However, weaker economies lead to a loss of confidence from investors, leading to currency dropping.

What does this mean for businesses?

During times where a business’ local currency is weak, it will mean that importing goods from foreign countries will cost more. Alternatively, when selling exported goods, you’ll likely have to sell them for less.

If your currency is strong, then it will benefit you by improving the deals you get on imports and exports. If you sell internationally, there’s always the risk of sending and receiving payments from abroad.

You can avoid this risk by using your own currency, but your customers will most likely want to pay in their own currency, and you may lose business altogether otherwise.

How can you prepare for this as a business?

All businesses should have a good knowledge of the foreign exchange markets, especially those who deal with international business.

Foreign exchange fluctuations can be managed, so having people in your team who can forecast the currency markets, recommend the best times to import from abroad and know when to reduce spend on imports will be an incredibly vital asset to your business.