How FX gains and losses can distort the financial position of an online business
Are you reporting 'real' or 'maybe' numbers?
Author: Chris Compston
Date: 06 May 2020
Is your Company's financial position being distorted by FX?
Companies that trade across borders inevitably end up collecting sales in foreign currency, which are reflected in their accounts in their domestic currency. Typically as the FX market moves, the value of this foreign currency goes up or down, creating an FX gain or loss. These movements are defined as “Foreign exchange gains and losses - an accounting concept that refers to the impact that foreign exchange can have on the financial statements of a businesses' monetary assets and liabilities. The distortion occurs when accounts indicate that the business made a good profit, but in reality the FX gains and losses have not yet been realised. They’re effectively ‘maybe’ numbers not ‘real’ numbers.
When a business needs to exchange an FX position, it rarely happens at the most advantageous time. This means that those profits can easily disappear. Consider for example, the recent market volatility caused by COVID 19. Businesses needed to unwind FX positions to boost cashflow, however they had the constant worry about when was the best time to ‘cash out’.
Another question a business should ask is ‘Why are we running FX positions?’? Their aim is to sell goods and services not act as currency speculators! For example, the market movement in March 2020 was around the 7% range amongst the major world currencies. If a position went against you…and with card processing fees added, you might be lucky to ‘break even’ on business that was previously profitable. This is all due to the associated risk of carrying an FX position. You can mitigate risk by taking out forward positions with your currency provider. However, with everything else a business has to manage, these hedging practices are normally left to skilled staff members of the larger online businesses - and it still leaves them open to risk and cost.
FXCPay helps solve this problem by providing companies with fixed FX rates against their price list. This enables them to price in the local currencies they need with the knowledge that they will always receive 99% of sales value including all card processing fees, in their preferred currency. This provides the business with real rather than “maybe” numbers.