Significant Fluctuations in the Exchange Rates

This year we have seen significant fluctuations in the exchange rates, especially for importers purchasing products in US dollars. The landscape for business in Canada has changed as the cost to importing products has increased over 30% in the last two years.  

Nadine Brosseau of Vapour Solutions, an import business owner in BC started her business in 2012. A perfect time for an importer to buy products at close to parity levels; she was protected against the foreign exchange risk that she is now facing today as the dollar has breached the 1.40 levels. Nadine states "The US exchange rate at its level now, is costing practically double the price to purchase and with the customs fees and GST, it's becoming more difficult to have a good profit margin to keep this industry thriving".  Purchasing her product from China, Nadine doesn't cut her inventory, her product is in high demand.  With business expenses increasing, profits decreasing and the balance of pricing the fair market value to the end user all weighs in on Nadine's business, she is optimistic, "this industry is evolving forward into a huge market".

This is happening to every import business in Canada, and the costs keep rising.  Think of every item in the household from food, spices, furniture, table ware, gifts and clothes that are affected by an FX rate increase. If the cost is too high, will the consumer buy products at last years levels?  Sarah, a boutique clothing owner said that she is just not ordering in from her US and China supplier right now.   Sarah can't increase her dress prices, her customers just won't go for the price increase and is now waiting to see if there is a breath of fresh air for the Canadian dollar in order to purchase her inventory for the next few seasons.

When costs keep accelerating, the margins or profit on the item being sold is being squeezed out due to FX losses.  A 2% rise in the FX rate at time of order to time of payment means a loss of 20% on margins.  There are many things an import business can do to help mitigate the rate increases.

1. Diversify where products are purchased.  If all products are imported from the US, there is a reliance on the Canadian dollars to US dollars exchange rate, and what that one <a rel="nofollow" onclick="javascript:ga('send', 'pageview', '/outgoing/article_exit_link/7389858');" href="http://mtfx.ca/personal-clients/money-transfers.aspx">FX market</a> is doing.  What if there were similar products in Europe, the UK, Canada.  By diversifying your supplier's portfolio, you can purchase your products from countries other than the US. Nadine has hedged her suppliers and purchases some of her product in Canada.
2. Receivables in the same currency as the payables. A natural hedge for import business.  Is your business able to receive funds in the same currency as you are able to order.  Money incoming from customers in the same currency as the currency needed to buy the import product.
3. Hedge FX purchases.  At time of order, purchase <a rel="nofollow" onclick="javascript:ga('send', 'pageview', '/outgoing/article_exit_link/7389858');" href="http://mtfx.ca/">FX in advance</a>. Forward contracts lock the rate timeclock to use funds at a later date, but using the rate of today. Buy in increments, use the markets to an advantage. Be proactive instead of reactive to the rates.
4. Use market tools.  Place in buy orders for currencies at a specific rate and dollar amount.  Market orders are a great way to help purchase currencies on the live market without having to constantly watch what the market is doing.
5. Cost calculators.  Know what the cost is for import products.  If there is a 30% margin at a rate of 1.40 it gets eaten away when the rates reach 1.41.  For every 1% change to the currency movements, it's a 10% loss if one does not change the price the product to the end user. Purchase as much currency in advance as cash flow allows, whether it's buying the currency outright or purchasing a <a rel="nofollow" onclick="javascript:ga('send', 'pageview', '/outgoing/article_exit_link/7389858');" href="http://mtfx.ca/institutional-clients/institutional-foreign-exchange/forward-contracts.aspx">forward contract</a>, before the rates reach past profit margins and the cost for product increases past the consumer price point.

 

As the business landscape changes for import business in Canada, protection of the bottom line is the most important issue facing business in Canada today.  Finding out ways to mitigate and work with the ever changing rates can help protect against cost increases for the business and for the end consumer.

Source : articlesbase.com