Foreign Exchange Management for Exporters

One of the major risks that an exporter faces is fluctuations in foreign currency exchange rates. Currency variations can quickly have a significant impact on your bottom line and, in extreme cases, even threaten a company’s survival.

The foreign exchange market allows businesses to convert one currency into another currency. For example, it would allow an exporter selling goods to Germany to receive payment in Euros and convert this amount into Australian dollars (AUD).

Some common terminologies that you may come across when undertaking a foreign exchange transaction include:

  • Spot rate: The exchange rate that is quoted for the sale of currency with a value date (the date that settlement is due for a foreign exchange contract) of two business days from the date of the quote.
  • Value TOM: The exchange rate that is quoted for the sale of foreign currency with a value date of following day.
  • Value TOD: The exchange rate that is quoted for the sale of foreign currency with a value date of same day.
  • Forward rates: Where the foreign currency rate is fixed at the time of the deal with a value date beyond two business days.

What is Foreign Currency Risk?

Put simply, foreign exchange risk is the risk that profitability and potentially cash flow will be negatively impacted by foreign currency exchange rate movements.

As an exporter foreign exchange risk often occurs because generally you will need to convert your invoice into your client’s currency at the prevailing rate on the day that the invoice is issued. Your client then settles the invoice in their local currency, typically anywhere between 30 and 90 days later depending on the terms that they have demanded, and then, only after the funds have been received, can you convert the payment into AUD.

This leaves you exposed to changes in the AUD during the time lag between an invoice being issued and payment being received. For example, if you are required to invoice a customer in their home currency and the AUD appreciates against their local currency during this lag period, you will receive less AUD than originally anticipated.

Therefore, it is important that this risk is managed so you can focus your energies on core business operations, and not currency fluctuations.

The ECA runs workshops that cover Foreign Exchange management in more detail.





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Ed Serrano
Managing Director,
VEKTA Advanced Automation
Member of the ECA

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