Small-medium businesses play a crucial role in a country’s overall gross-domestic-product (GDP). According to Alan Safahi, a business advisor, entrepreneur, and San Francisco Startup Founder, small-medium enterprises contribute to 50% of the U.S GDP.
However, Safahi says that companies often find it challenging to manage cash flow, especially when they do business overseas with significant currency fluctuations, leading to uncertainty and risky profit margins.
Alan Safahi of Orinda advises businesses to use the right combination of cash management payment strategies to improve their cash flow and protect profits. For instance, Safahi recommends having foreign currency accounts because they are ideal solutions for companies that have several transactions in specific currencies.
Besides, having cash ready in a particular currency can help businesses make informed decisions, react quickly, and reduce risks. Foreign currency accounts also lessen the need for multiple currency transfers. In today’s article, we will give you five currency exchange strategies to benefit your business. Read on!
1. Use Spot Payments
Spot payment is an excellent strategy for businesses, allowing them to buy or sell currency at the current rate. Safahi recommends spot rates for smaller and less regular payments. You can also use it for rapid currency exchange. Make sure you look for providers that offer competitive spreads and low fees between buying and selling rates.
2. Hedge with a Forward Contract
It is an effective strategy that allows you to buy a set amount of currency for settlement at a predetermined exchange rate and a determined value date in the future. A forward contract is suitable for businesses, especially when they want to protect against fluctuations. It is also helpful for budgeting and money management. For instance, when you fix prices in advance, you can budget and plan easily while knowing their costs.
3. Leverage from Online Transfers
Online transfers provide effective and easier cash management, allowing you to increase payment visibility. Using online transfers enables you to set cost-effective invoices with overseas vendors. For example, Zed Network , a payment orchestration platform focused on cross border payments and foreign exchange (FX), offers an online FX platform, allowing business owners to manage global payments online effectively and easily at any time with the lowest costs and the most competitive FX rates.
4. Use a Budgeting Tool
Safahi recommends selecting the right budgeting tool that streamlines the currency exchange process and gives you more visibility over exposures. Use a budgeting tool that calculates currency exposures for different invoices automatically.
For instance, you can go to a single platform and evaluate your cross-border cash flows, especially incoming and outgoing cash flows in your home currency. That way, you can make informed decisions and mitigate risks.
5. Settle Invoices in Local Currency
It is crucial to settle invoices with your overseas vendors in the local currency. According to Alan Safahi, one in five suppliers from China adds 3–4% to U.S dollar invoices. The purpose is to cover fluctuations in foreign exchange. When you deal with vendors in their local currency, you can negotiate with them and get a discount.
If you want to streamline your currency exchange operations, make sure you implement a solid plan. Don’t worry about where the rates of exchange go because after you determine the rate, it is still suitable for you even if the rate moves down the line. The five tips given above will help you optimize your currency exchange processes and reduce risks.