How SMEs can manage currency risks

Anyone who trades internationally in different currencies knows that exchange rates can become a cost trap. "Many SMEs lose money on foreign currency transactions - without realizing it," says Allan Abt, Managing Director of wechselstube.ch, a digital platform that offers current, tradable and fixable exchange rates for the twelve most important trading currencies. "Those who actively manage their foreign exchange transactions gain cost advantages and more planning security." Abt offers the following practical tips for avoiding unnecessary currency risks. 

Do's - these measures can save money

• Compare fees and margins: Many banks and payment service providers add 1-2 % to the exchange rate. That may not sound like much. However, for larger or many smaller amounts spread over the year, this can significantly reduce the margin. It is therefore worth comparing different providers - and not just the exchange rate itself, but also the additional fees incurred. Some offer attractive rates but charge high transaction costs.
• Monitor and trade exchange rates: Price fluctuations cannot be avoided. However, you should keep an eye on relevant currency pairs. An exchange rate alarm or good charts help you to recognize a good time to exchange - and avoid losses due to spontaneous or unfavourable changes.
• Netting - income and expenses in the same currency: If you have income and expenses in the same foreign currency, you can offset them directly against each other - instead of immediately changing them into CHF. This saves exchange fees and minimizes the currency risk.
• With a budget course work: Many SMEs plan with a so-called budget exchange rate. This fixed, internal exchange rate helps to calculate their foreign currency sales - for example when planning budgets or setting prices. Important: The exchange rate should be reviewed regularly and adjusted if necessary.
• Plan for foreign currencies in good time: Planning is half the battle - even in the foreign exchange business. The need for foreign currencies should be planned at an early stage - for example as part of the annual budget planning. This includes an overview of foreign currency positions (at least 12 months). A separate foreign currency account also increases flexibility when making payments.
• Know the exchange rate before the transaction, not after: With banks in particular, SMEs only find out the actual costs after the foreign exchange transaction. So if you pay an invoice in a foreign currency, you will only see the exact amount charged to your Swiss franc account after the payment has been processed.
• Use forward transactions: With forward transactions, SMEs can fix exchange rates for payments at a later date and thus eliminate risks from exchange rate fluctuations.
• Pay bills in local currency if possible: It is often cheaper to pay invoices in the supplier's local currency, as the supplier will otherwise add its own exchange rate surcharge.

Don't - these mistakes are unnecessarily costly

• Underestimate the influence of exchange rates: It's only small amounts... Many SMEs neglect the issue - and lose money without realizing it. Even small exchange rate fluctuations can have a significant impact on margins for larger amounts.
• Sitting out price losses: Hoping instead of fixing? Not a good idea. Many companies switch "on instinct" or wait passively until maturity when exchange rates are unfavorable, hoping for a recovery.
• Only bet on daily rates: Anyone who only trades at the current market price is taking unnecessary risks and foregoing the benefits of hedging instruments such as forward transactions
• Always pay invoices when they are due: Why wait until maturity? If you exchange earlier when the exchange rate is favorable, you save money. Foreign currency can also be bought in advance and parked in your bank account.
• Stay with the house bank because it's convenient: It pays to compare: independent providers often offer better rates for the most important trading currencies than house banks - even via the house bank's account.
• Do not have a foreign exchange strategy: SMEs know that planning is the be-all and end-all. Those who act without a foreign exchange strategy often act according to the situation and miss out on potential savings. It is worth setting clear goals and measures for foreign currency management and planning currency exchange transactions in advance.

Source and further information: www.wechselstube.ch