If you work with a company that does international business, then you have a connection to the concept of Forex.
Short for foreign exchange, the concept has to do with calculating out the current rate of exchange between currencies of different countries.
Here are some of the factors that come into play when it comes to arriving at and updating those rates of exchange, and how that impacts the bottom line of your employer.
There are actually quite a few different factors that come into play in order to arrive at a current rate of exchange on the currencies of any two given countries.
For now, let’s focus just on the economic issues that often come into play.
The most basic of the economic factors is the balance between imported and exported goods and services between the two countries. Ideally, the trade flow between the two countries will be somewhat balanced and very steady in nature.
However, should the situation shift so that the demand for a given country’s goods and services decreases, then there will be a downward change in the rate of exchange between the two currencies.
What this will mean for your company is that any rates they have extended to foreign entities, if the rates were extended in something other than the currency of the country where the client resides, will yield less gross profit.
In some cases, the shift could become so severe that you cease to make any real profit off the business at all.
Of course, the flow of goods and services is not the only economic indicator that comes into play.
The fiscal responsibility of your government also comes into play when rates of exchange are put into place.
As an example, if your country is currently experiencing a budget deficit – that is spending far more revenue than it is taking in – this will unfavorably impact the rate of exchange of your currency.
Governments that over time have demonstrated the ability to incrementally cut their national debt rather than have a sudden upswing in deficit will enjoy a better rate of currency exchange with other countries.
For your company, that means anyone that you have quoted in terms of the currency of your home country will very possibly be making more profit for you today than they did yesterday.
Generally, companies tend to bill international customers in the type currency used by those clients.
For example, if you are a US based company that has a sizable UK clientele, you will bill those British clients in terms of British pound sterling rather than American dollars.
In order to provide conversions for billing, many companies opt to use the rate of exchange as of the day that the goods and services are actually billed, even if the actual usage took place earlier in the month.
This helps to keep the invoicing easy for your Accounts Receivable personnel as well as making it easy for your customer’s Payables department to process. T
his can also keep the process of Forex from creating any type of credibility issues from arising for you or for your client.
It should be noted Forex trading involves substantial risk of loss and is not suitable for all investors.