How to Maximize Profits When Invoicing Overseas Clients

Last Updated: 11 Aug 2020

Introduction

Risk frequently follows the opportunities for foreign business transactions. With the advancement of technology, along with innovation in eCommerce, it has become easier for companies to operate virtually, without geographical constraints.

Nevertheless, businesses can become vulnerable to the volatility of foreign currency volatility, which can add significant unplanned currency loss write-downs and cash flow constraints. Small to medium-sized businesses, in particular, are especially vulnerable since many operate on a knife’s edge of profitability.

Businesses that consistently invoice clients and deal in foreign currencies must make decisions that range from the frequency of invoice cycles, to how to bill, as well as which currency to use in billing.

By far, the most important invoicing decisions relate to foreign exchange risk management and how to manage currency exchange rate volatility. For example, a loss in the currency exchange value of just a few pennies over a few months could translate into the loss of thousands of dollars in profits for a high-value transaction.

Making the right choices and implementing a strategy to streamline invoicing operations when working with international clients will help protect cash flow and business profits, regardless of currency market volatility.

This blog will:

1. Identify common areas of problems for international invoicing.
2. Explore solutions to create efficiencies for receiving incoming payments in multiple currencies.
3. Describe specific currency risk management solutions aimed at reducing the risk of lost profits from volatile currency markets.

International Invoicing Options.

Points to Ponder:

How often to invoice matters when dealing in foreign currency because of fees and fluctuating exchange rates.
Billing is an important consideration when dealing with currency exchange and fees. It makes more sense, for example, to bill monthly, rather than weekly, because the flat fees are the same regardless of the size of the currency conversion. It is essential, however, to be sure that monthly billing will not negatively impact cash flow.
Your invoicing style will rely heavily on the transaction type that you are conducting. For example, understanding whether your invoice will require a specific amount on a set date in a particular currency, or if the amount of the invoice is based on month-to-month variations in delivery.
You need to choose the currency to pay your invoice. For example, does it make more sense to bill in your local currency or your client’s?

Based on the foregoing and depending on which solution you select for receiving payments, you need to outline a workflow that optimizes profits and minimizes risks.

Receiving Payments and Invoicing in Multiple Currencies

Receiving invoice payments in multiple currencies previously required a brick-and-mortar overseas bank account. As the only option, that banking arrangement posed the following challenges:

Inconvenient delays in access to deposited funds
Time delays and restrictions surrounding transmission/receipt of funds
Loss of profits as currency volatility eroded the value of the funds on hand
Diminished cash flow due to high transaction fees

With the onset of financial technology, new vistas have opened for both invoicing and managing currency exposure. Access to currency accounts is as easily accessible as a web browser. Payment deliveries are now measured in hours rather than days. Most businesses have access to risk management tools that can either opt in or bail you out when currency rate exchanges either rise or fall to a level acceptable to your business.

So, with the onset of new payment mediums, advancing technology, and payment innovation, overseas invoicing strategies include more agile and flexible options:

Option 1. Convert currency during times of favorable exchange rates.

Foreign currency hedging tools, described below, allow businesses to determine the right time to convert their currency. When a business receives an alert that an optimum currency exchange rate has been reached in the foreign exchange market, they can choose to convert the funds and significantly increase their profits.

Option 2. Hold the currency and send an outgoing payment request without having to convert funds.

This option further empowers businesses to decide if they want to convert their foreign currency. If the business decides to send an outgoing international payment in the same currency, they can do so without having to reconvert funds. This would eliminate the requirement of converting incoming payments into your local currency, then reconverting the funds back to the foreign currency to affect payment.

Option 3. Engage a foreign exchange solution provider to handle options 1 and 2.

Foreign exchange and global payment solution providers are a great options for businesses that have international clients. They typically work with over 120 different currencies in virtually every country in the world. They also do not charge additional transaction fees and provide currency exchange rates that banks cannot match.

Foreign exchange solution providers also offer insightful analysis and commentary on currency markets as well as a slew of risk management tools with strategies aimed at managing currency exposure, optimizing cash flow, and securing profits.

Risk Management Strategy: Securing Exchange Rates.

Securing the best exchange rates involves a sensible risk management strategy. The strategy cannot always predict the best exchange rate, but it can mitigate exposure before the bottom drops out of your cash flow.

Pairing multiple currency management options with a risk management strategy allows for stable cash flow and reliable forecasting. The tools to manage foreign exchange currency risk are forward contracts and market orders.

Forward Contracts

Forward contracts are one of the most popular tools because they minimize or negate risk, with a guaranteed exchange rate. They lock in currency exchange rates up to a year in the future. The forward contract allows a company to forecast expenses accurately by knowing what exchange rate will be used.

Market Orders

Market orders allow you to either capture a move in your favor or protect against an adverse currency movement. There are two types:

Limit orders, which target exchange rates that are better than the current market rate
Stop loss orders, which protect you against market volatility by setting a worst-case exchange rate and triggering a trade.

Summary and Conclusions

Doing business overseas requires an agile and flexible invoicing strategy to avoid the pitfalls of currency volatility. Businesses must decide how often to invoice and which currency to use.

Emerging financial technology innovations have taken much of the pain away from dealing with overseas customers, but businesses must decide when and if they need to convert currency transactions to achieve the least currency rate volatility exposure.

There are a variety of strategies in handling foreign currency for invoicing. If you do a large amount of overseas invoicing, foreign exchange, and global payment solution providers offer a great alternative to banks.

Finally, the risk management tools including forward contracts and market orders allow you to both lock in favorable exchange rates and automatically trigger currency trades as the rates rise or fall.

Open your account in less than five minutes and we'll show you how foreign exchange currency risk management can protect as well as increase your business's profits.

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