Expanding into other countries can be an exciting time for your business. You’re accessing new markets, diversifying your revenue streams, and hopefully strengthening your profits. Of course, expanding overseas also brings some risk, particularly considering currency.
Knowing how to reduce and manage this risk effectively is key to giving your expansion the biggest possible chance of success. If you’re ready to learn more, keep reading as we explore how your US company can reduce risk when expanding overseas.
Currency risk is real
One of the biggest risks to your international expansion is currency exchange rate risk. Fluctuations in exchange rates can affect everything, including pricing, contracts, and forecasting. If the US dollar becomes weaker, your business might end up spending more for the same amount.
In other words, as the exchange rate fluctuates, the amount of revenue you earn from a specific country will also vary. You might assume that minor changes will only have a minor impact, but as your market share and revenue grow, even a small change can have a dramatic impact on your revenue stream.
Fortunately, there are ways you can try to offset these differences, giving your business a more reliable income stream.
Common hedging approaches for global growth
Forex hedging strategies are excellent tools that are used internationally to reduce risk and create a fair exchange, even during turbulent economic environments. One particular method you may want to consider is forward contracts.
A forward contract is a customizable derivative contract between two businesses to buy or sell an asset at a specified price and on a set date. This can help provide a more secure exchange, as both the buyer and seller know ahead of time what the cost will be. Without a forward contract, a changing exchange rate could change the price drastically, preventing the buyer from completing the sale or leaving the seller in a poor financial situation.
What to consider before launching abroad
Before you begin expanding overseas, it’s a good idea to set up strategic hedging plans. This can help your business secure contracts at a favorable rate, while also ensuring your initial revenue isn’t subject to change.
We recommend researching the exchange rates for your intended expansion countries and noting a reasonable average. You may find that when you begin negotiating the contract with your counterpart, the specific amount is subject to change; however, both parties should try to agree on a fair and reasonable price.
