Advice Please On Converting Rates of Exchange

[Colin In Perth]

Do any of you out there have some good sound advise for me regarding International Trading and how Rates of Exchange will affect what comes out of my bank account and what then goes back into it.

I am well aware that rates of exchange change all the time but I start to get confused when 3 currencies are involved. To date I have traded only within UK but now I am about to cast my net much wider. Below is an example of a purchase and sale I will soon be encountering and below that some questions relating to it which I hope can be answered.

Example:

I buy 25 tons of product which has to be paid in Euros to sell to a customer
who I have to send the quote to in $USD. I make the convertion on the day using the currency converter on google and send the quote.
The customer pays me in advance to my UK bank account. The bank will convert it into £GBP. I then pay my supplier who is paid in Euros from my UK bank account so the conversion is then done from £GBP to Euros. That is the deal concluded. All transactions are done by TT.

Question:

Based on the above example which way round is it for me to benefit from buying in Euros, Banking in GBP and selling in USD and which way round will I lose out. Taking our £ as the benchmark, if the pound is weak against both the USD and the Euro will that be an advantage or a disadvantage when based on the example above. If the pound is strong against the USD and Euro will that be an advantage or a disadvantage when based on the above example? And what if the Euro is strong but the USD weak or the Euro weak and the USD strong?

I have attempted to get to grips with it myself but I'm not convinced I've got it right, so maybe there are some people in the forum who are already familiar with the above and can help.

 

[Mike Lewis]

Colin,

I can't answer your question in detail, but I can tell you this: the rate of exchange you see published in the press or on websites is only a small part of the story. What's much more significant is the commissions, fees and handling charges imposed by the banks -- on both sides of the transaction.

For a transaction involving two currencies, you can reckon on losing anything up to 10 percent -- possibly more -- to the banks. You will pay part of that cost yourself. Your customer will pay another part, which means you will either have to lower your price or face being uncompetitive.

My company is probably much smaller than yours, but I've faced all these problems. I do a lot of work for US clients and it was costing me large amounts of money just to pay in their cheques. My solution was to open an account with an American bank. I now pay all my dollar receipts into that account, and use it to finance USD purchases and expenses. That way, there are no bank charges (other than normal current account charges) and no worries about losing money on a particular transaction because of exchange rate fluctuations.

But however you decide to physically handle the currencies, there is also the issue of how the "gain and loss on exchange" shows up in your end-of-year accounts. This is a figure that reflects the difference in the value of your foreign currency holdings over the year - nothing to do with the transactions that have taken place. If the sterling value of the currencies are increasing, this figure will add to your profit and will therefore be taxable. If it goes down, it reduces your tax. There's nothing you can do about that (as far as I know) except to hope that it will balance out in the long term.

I hope this is useful.

Mike

 

[Colin In Perth]

Thanks for the advise. It was genuinely helpful.

 

[Adventurelife]

If you are just doing this a few times you will take a hit a few times as described above. If you are going to be doing it a lot you need to open bank accounts in the USA and European country you are trading with.

I would also engage the services of a currency trader as they spend all day watching currency movements and if you are talking large amounts of cash they can save you a lot by various routes. Again if you are talking large amounts you will probably want to start taking currency positions ahead of doing business. Again I would use a currency trade for this.

 

[stugster]

Just a "thinking out loud" here: does PayPal penalise you for having multiple currencies? Perhaps this could be an option?

 

[Scottish Business Owner]

I've done a quick spreadsheet on googledocs on this which you may or may not understand. It has been avery long day so perhaps a few others can scrutinise my conclusions before you take it as gospel

Some good points from Mike & Peter and I think I would stress again that my spreadsheet does not take into account converting currency so I think we need to assume that in all cases this will hit your margins.

Mike also makes a great point about foreign currency revaluation but this will ultimately depend on what sort of values and if it's small may not be a big issue. It is normal though when you do this regularly to revalue the currency you hold every so often in order to reflect current exchange rates. This will leave you exposed to fluctuations.

Take a look at the spreadsheet and please everyone point out the mistakes I am sure I have made

http://spreadsheets.google.com/ccc?key=rc7yQJMiA6L9RhJoqSWD9Og

 

[PennyPR]

I suspect it's more of a cashflow problem as you can't predict currency movements accurately and the cash you need will by sods law be sitting in the wrong currency account.
If you have to pay for goods in one currency and take in payments in another when both are moving against you all you can work out is the breakeven and the breakdown points. And balance that against the fees for paying to hedge your future positions. You may have to, to protect your business continuity.
I don't know if a currency trader would be more cost-effective than a bank for that? Sounds like Adventurelife would know that one?

 

[Mike Lewis]

Just a "thinking out loud" here: does PayPal penalise you for having multiple currencies? Perhaps this could be an option?

I don't know the answer to that, Stuart, but my guess is that that wouldn't solve the problem. After all, PayPal have to work with the same banking system as the rest of us. But I might be wrong.

Mike

 

[Colin In Perth]

I've not logged in for about a week and it's good to see my question has created quite a bit of response.

I do now see that it is important to have bank accounts in the countries where the currencies are from. As most of the purchasing will be done in Euros I will open an account in Spain with Santander as I already do the business banking in UK with Abbey and they are changing their name to Santander here next year. It might be cheaper to have currency conversions done through the same bank.

I am not sure if PayPal would be suitable. The orders are for several 25 ton contaners moving by sea freight with values of approximately $35,000 USD per container so those kind of sums may exceed what PayPal handle, although I'm not sure. The amount of money involved in the buying and selling is large, but the profit margin I will take is quite small at about 20%. This is why I am concerned about losing out when currencies are converted.

I have downloaded and saved the spreadsheet by hynd - thank you for that. I do understand what it is and how to use the info on it. Thankfully I am familiar with googledocs and spreadsheets. The spreadsheet gives me exactly the info I needed.

Thanks to everyone who have so far replied to my question.

 

[Mike Lewis]

Colin,

Glad you've found this useful.

Just a couple of quick points ....

If you're happy with Santander, that's fine. But don't let the fact that they own Abbey be a factor. The whole point of maintaining bank accounts in different countries is to avoid -- or at least minimise -- the need to convert currencies. The cost of moving between Santander and Abbey shouldn't be relevant. In any case, I doubt if the fact they are under the same ownership would make the transaction any cheaper (but that's just a guess).

I also think you're right to ignore PayPal. Apart from the fact that it's unlikely to be cheaper than traditional banks, it's not really suitable for large-scale commercial transactions. PayPal if fine for buying some CDs on eBay, but I doubt if many large companies are geared up to using it as a normal payment vehicle. Again, that's just my opinion; I'm willing to be proved wrong.

Mike