Exporting is a great way for businesses in B.C. to grow with new customers. That said exchange rates can make selling internationally tricky. Exchange rates play a big role in international trade, impacting your pricing and profits. Since currency values can change, it can be difficult to know how to price your product in international markets. In this blog post, we’ll explain how exchange rates can affect your business and share tips on managing these risks as you grow.
How exchange rates affect your business
An exchange rate is the value of one country or region’s currency compared to another. They can change because factors such as inflation, political conditions, interest rates and recession.
The price of your product or service can be affected as exchange rates change. When the Canadian dollar becomes stronger compared to another currency, your products might cost more for customers in that country.
For example, if you’re exporting clothing to the U.S., a stronger Canadian dollar means American customers need to spend more to buy your goods. Let’s say that in January, $1 CAD equals $0.85 USD. For products worth $100 CAD, your American customer will spend $85 USD. If the exchange rate changes later in the year so that $1 CAD is now equal to $0.90 USD, your American customer is now spending $90.00 USD for the same product. This is important, as relative price increases might reduce sales.
The opposite is also true. A weaker Canadian dollar can make your products less expensive for international buyers, which could increase demand. For example, if $1 CAD drops from $0.85 USD to $0.80 USD, American customers are now only spending $80 for the same item. This can attract more buyers.
Currency changes can affect your cash flow, too. For example, if you sell a product when $100 CAD is equal to $90 USD, yet you don’t get paid until three weeks later, when $100 CAD is only equal to $80 USD, you lose out on $10 USD per sale. This can make it harder to plan for expenses or investments.
How to protect your business
While you can’t control exchange rates, there are things you can do to reduce their impact. It’s important to understand these factors so you can develop a pricing strategy that works. A pricing strategy includes elements such as your market objectives, product costs, demand, competition and of course, exchange rates.
Below are a few tips to help you.
- Fix your rates ahead of time. Forward contracts are designed to allow businesses to lock in the current exchange rate. This way, no matter what happens to the market, you’ll know exactly how much money you’ll receive. For example, if you sign a forward contract when $1 CAD is equal to $0.80 USD, your product will remain at this rate, even if the exchange rate changes. This lets you to predict costs and revenues better.
- Spread out the risk. Selling in multiple markets can also help balance out risks. For example, if you do business in the U.S. and Europe, a stronger Euro can balance out any losses from a weaker U.S. dollar. This helps to ensure that your business has consistent income, despite exchange rate changes.
- Price in Canadian dollars. Where possible, price your products in Canadian dollars. This moves the exchange rate risk to your buyer which gives you with more financial stability. This may not be easy in competitive markets where buyers want to do business in the local currency. If that’s the case, you can explore a flexible pricing model, designed to both protect your business and cater to your customers’ needs.
Resources you can use
There are plenty of resources to help guide your way. Export Development Canada provides tools and products to help you manage foreign exchange, like the Foreign Exchange Facility Guarantee. EDC’s services include solutions such as forward contracts and market insights to help you make good decisions. Many banks also offer business foreign exchange services to help you stay ahead of currency changes.
Exporting is a great way to grow your business, but you need to plan well. Your Export Advisor can connect you with the right resources at the right time so your business can thrive internationally.
Get help
Looking for one-on-one support to understand how exchange rates impact your business? Connect with an Export Advisor to learn more about how they can help you take your business global.
