Expanding overseas

Setting up a foreign exchange strategy for your business

4 min read

New Zealand is a great place to do business and consistently ranks at or near the top of annual lists put together by the likes of Forbes and the World Bank when it comes to ease of doing business. It’s also a small market and that means local businesses in search of growth often look overseas.

Trading overseas, either through exporting or setting up shop offshore, brings with it a number of new business challenges that can vary from territory to territory.

But there’s one aspect of trading overseas that all New Zealand-based businesses need to come to terms with no matter what logistical efforts are involved — foreign exchange. Here’s a few tips to make dealing with foreign currencies work for you.

Getting started

When it comes to dealing with foreign currencies and the inherent fluctuations involved, there are three important facets to running an efficient overseas operation from New Zealand; setting a Foreign Exchange policy (FX policy), having a strong understanding of your forecasts and, lastly, a solid grasp on the payment flows in and out of your business from overseas.

Setting an FX policy

When someone comes to us and says ‘we want to expand overseas’, some of the first questions we ask of them are ‘what’s your plan?’, ‘where, why and how are you going to do it?’ and ‘what are the funding implications?’. From the bank’s point of view, the first step is always to sit down with a client and figure out a game plan that’s specific to each individual business.

It all depends on the client. While there’s no ‘one-size-fits-all’ solution, setting a FX policy should be a first step.

Having a FX policy in place is something every company trading offshore from New Zealand should do. It’s plain good governance, planning and de-risks the CFO’s role somewhat because it gives them a rulebook to play with. For any clients that question the value of an FX policy a key question we always ask is ‘are you a speculator on FX or are you an exporter?’, and the answer is always that they’re an exporter.

Creating an FX policy doesn’t have to be overly complex. It could be as simple as having a policy that says your company is going to lock in 50 percent of forecast revenues from the United States. For example, if you have $1 million in revenue, you can say with complete certainty that $500,000 of that is going to provide this much in New Zealand dollars, while the rest you do not convert into New Zealand dollars at all, but remains in that foreign currency and can be utilised for costs in that same foreign currency or converted to New Zealand dollars at a later date.

The point here is that this approach gives your business a degree of certainty that otherwise wouldn’t exist. It’s not much different from what you do with your home loan. You might have some floating, some fixed, depending on how much certainty you need in terms of cash flow. All of this plays a role in helping a business forecast revenue and expenses.

Understand your forecasts

By having some certainty around foreign exchange, businesses can forecast a lot better — you’re effectively locking in a price that you can plug into your forecast models and understand where you’re going to be revenue-wise and cost-wise.

This, in turn, can often help with increased access to bank funding to help support your export growth.

Know your payment flows

With a FX policy in place governing your tactics, it’s time to think about the next part of the equation, and that’s the process of actually getting that money back to New Zealand and understanding how money flows in and out of your business.

Your bank can help with all the foreign exchange cash flow by setting up foreign currency accounts in New Zealand. A company can utilise those foreign currency accounts to hold a wide range of currencies and pay away funds as needed. There are a number of advantages to this, not least of which is the ability hold the money without converting it. Reason for not converting might be because you’re waiting for a more favourable exchange rate, or in case you need to make a payment in the same currency.

You don’t want to be exchanging money back and forth more than you really need to because there are costs involved every time this happens. It’s all about sitting down and working out what all your flows in each currency look like.

Work closely with your bank

A hands-on approach is best. Banks have strong overseas networks and it’s worthwhile taking full advantage of these. It’s really about us facilitating a conversation in order to get a deeper understanding of a business and its plans. We recommend businesses bring their advisors along with them so they’re part of the same discussion.

It’s important to have good modelling so businesses expanding overseas have a solid view of what their foreign exchange exposure truly looks like.

Link

BNZ offers a range of solutions for international transactions