The multi-currency marketplace: is your company up to it?

• Author: McKie, Stewart

The multi-currency marketplace: is your company up to it?

American companies have learned a tough lesson in recent years: competing effectively in a global marketplace requires playing by a different set of rules than those governing purely domestic purchasing and sales. The increasing sophistication of all the major trading countries' banking systems has meant that international credit and settlement facilities are now within the reach of even the smallest organization. Ten years ago, such international trading was the sole province of the major multinationals and specialist import/export houses. However, the new cutthroat economic climate has mandated that nearly all American companies look beyond our shores for new markets and sources of materials.

Given this inherent internationalization of business, American firms must understand and adjust for forces that increase their exposure--and also create new opportunities--in the worldwide marketplace. One critical force all too often overlooked by American firms is the multi-currency environment of international trade. The need to buy and sell in a variety of currencies other than dollars presents two critical points of exposure for American companies large and small: currency value and financial reporting and accounting.

Currency-exposure safeguards

Changes in exchange rates can have a material effect upon profitability, especially when a company extends or accepts credit. A simple example illustrates the problem of losses due to exchange rate movements.

An American company sells goods worth $1,000 to a British company and offers 30 days of credit. At the time of the sale, the value of the goods is 543.48 based on an exchange rate of 1.84 to the pound. After 30 days, the payment of 543.48 is made, but, when converted to dollars, the American company receives only $989.26. The discrepancy between the selling price and the amount received reflects the change in the exchange rate of $1.84 to $1.82 during the intervening month, causing an $11 loss.

Such a situation is called a realized loss because, now that the transaction is over, it can be quantified. The same consideration also applies to a realized profit when it occurs. In either case, factors such as the length of time before payment and the volatility of the currency involved can have a negative effect on the firm's financial statements.

The company can employ a variety of tactics of safeguard against shifts in currency value. These techniques include:

Trade only in the domestic currency. This is the preferred option of most American companies, but we do not...