Identifying the hidden costs of exchange rates
INSIGHT ARTICLE |
Automotive suppliers and OEMs know that running a successful global company is not easy. One of the many contributing factors that makes it difficult is the unpredictable movement of exchange rates in the currency markets. Most companies acknowledge the impact of foreign exchange rates on their businesses, but many do not know how to hedge against that impact, and how much their strategy costs.
By identifying the hidden costs within foreign exchange transactions or implementing risk-appropriate hedging strategies, companies can take some control to minimize the effects of volatile markets on the bottom line.
To understand the true cost of doing business internationally, it is essential to know the embedded fees in a company’s foreign currency payment and hedging activity. If a business is operating internationally, it is conducting wire or payment events that have it (or its portfolio investments) translating into or out of a foreign currency. Chances are the financial institution conducting that transaction is actually participating in the profit margin or spread on that trade—usually to the tune of 1 to 3 percent or more, including additional fees and transaction costs. Management may not even be aware of it.
Many firms erroneously focus on the fees charged for transactions, but these usually pale in comparison to the actual spread paid to the bank executing the transaction. This unseen spread can cost companies hundreds to millions of dollars:
- A company discovered its bank collected 3 percent of the business’s annually transacted $20 million, resulting in $600,000 of that currency actually going to the bank rather than to the company.
- A $160 million manufacturer with 10 to 18 foreign exchange transactions each month identified over $300,000 in annual hidden costs.
- A U.S.-based manufacturer with operations in Mexico and a subsidiary in Germany processing 15 to 20 foreign exchange payments per month identified more than $85,000 in these hidden annual costs.
A critical analysis can shine a spotlight on those hidden costs to enable the creation of an actionable strategy to reduce costs and improve a company’s bottom line.