Currency conversion 101
TL;DR
Understand first what your customers need, second what finance needs and then what your systems and process can handle.
Our preferred way is to update currency changes monthly to neatly align with monthly reporting and to add a buffer to the calculation to cover transaction costs and variability. For example:
Price x exchange rate x buffer
If you buy from or sell goods to another country then managing your currency conversion is critical to maintaining profitability.
In my experience there are three key areas to consider when considering how to best approach currency conversion:
What works for your customers?
What does the finance team need/want?
What is the impact on systems and processes?
Let’s tackle them in order of importance and then wrap up with some thoughts on best practice.
What works for your customers?
This to me is the most important. If every sale is a one-off then you could update pricing daily with minimal impact on your customers. If you are in B2B and have recurring purchases from the same customers then varying pricing too often will usually cause issues.
Talk to the best people internally to understand any customer impact. This could be the Head of Sales, the CEO or the Customer Success lead.
Once you understand what impact is acceptable, you are ready to understand what the Finance team needs out of the process.
What does the Finance team need/want?
The finance team is important to consult with. They manage tax, and currency hedging and are best placed to understand the costs of handling multiple currencies.
Be prepared to call a customer representative if Finance wants anything that you know is against the best interests of the customer. Finding the balance between keeping customers and the Finance team happy is key!
The finance team will often tell you to use a buffer in currency conversion so that the costs of the conversion are accounted for. If you only look up the rates to convert currency and use this to calculate pricing you won't be taking into account the costs to convert charged by your bank or financial institution.
If you prefer to update pricing related to currency changes on a set period (we like monthly) Finance needs to be onboard. Once they understand the implications on costs and profitability they can advise how best to handle them.
What is the impact on systems and processes?
While this is number three, don’t underestimate it. Many systems handle currency conversion in overly complex ways that may or may not come with unintended side effects. Also if you update costs or sell prices more often than your reporting period this can cause reporting and reconcilation headaches.
Don't forget about sales commission calculations when assessing impacts.
Once you have considered all the impacts, test the new process and reassess if unintended consequences are discovered.
Thoughts on best practice
In my experience simplicity always is best. This means a regular schedule to update costs or sell prices. I have found monthly to work best but it does usually require an additional buffer to cover any intra-month variability in currencies. For example:
Price x exchange rate x buffer (a factor to cover transaction costs plus a factor to cover variability). e.g. The buffer may be 2.5% for costs and 2.5% for variability.
Of course, the best-laid plans can be undone. We are currently in a period of faster-than-usual currency change with most currencies dropping relative to the US dollar. If you can accept the positive or negative impact, it’s best to stick to your normal update schedule. Trying to change the process to cope with short term volatility can impact customers or introduce other issues. Increasing your variability buffer may be a simple fix.
Please Note
This article is very high level, your actual circumstance is almost certainly more complex and challenging - please feel free to reach out for a chat or just send me any comments or questions to:. matt[at]productengine.app
The US dollar Index (DXY) showing strong growth over the last 12 months. https://tradingeconomics.com/dxy:cur
WARNING
Diving too deeply into currencies and exchange rates may cause you to start using terms like the DXY (‘the dixie’), forex and fiat. This may lead to your friends staring glassy-eyed at you as you regale them with all you have learned.