When exporting means losing big money – exporting tips for CFOs
13 October 2013 · 2 min read
Exporting is on the increase as a means of growing a business. European companies look for clients overseas to compensate for the low demand in their domestic markets, and Asian economies, China in particular, are mainly based on exports. In some countries like Luxembourg, the amount of exports plus imports is even larger than the GDP (Gross Domestic Product).
A comprehensive FX strategy is crucial when conducting FX transactions and corporate finance departments must pay more attention to formulating one, as demonstrated in the ACCA-Kantox FX survey detailed below, which also contains actionable advice for CFOs and treasury managers.
Nevertheless, to be competitive, companies who export usually invoice their clients in local currency. That means they have then to exchange the currency they receive from their clients into their own currency and therefore they support foreign exchange (FX) risk. For example, a European company exporting to the USA is usually paid in US Dollars by its clients and has to exchange the very same US Dollars into Euros. Given that there is a gap between the time when the company invoices the client and the time when the company is finally paid, any adverse exchange rate movement means financial losses for the exporter.
According to a recent FX Survey by ACCA and Kantox, one third (33%) of respondents experimented currency loss or gain of more than USD 1 Million in 2012. So, exporting definitely provides leverage to grow, but in some cases it means financial losses. Below are 5 examples of large financial losses due to adverse exchange rate movements:
- Procter & Gamble – 2012 – USD 3 billion loss in revenue and at least USD 400 million in profits.
- EADS – 2009 – EUR 2.5 billion loss in revenue.
- Google – 2009 – USD 300 million loss in revenue.
- Fortune 2000 companies – Q3 2012 – Combined top-line losses totaled USD 22.7 billion.
- Daimler, BMW, Volkswagen and Porsche – 2008 – Combined USD 1.500 million loss in revenue.
These examples mainly relate to large corporations, but SMEs (small and medium sized enterprises) are just as much impacted and usually have far less resource to hedge foreign exchange risk. In 2010, over half (55%) of UK SMEs did not protect themselves against currency volatility and as such, the potential revenue loss was estimated to £20.4bn.
Naturally, all these findings also apply to import companies with payments in foreign currencies to overseas suppliers.
If you want to discover the best exporting tips for CFOs, download the following paper on the findings of a survey of over 100 SMEs and mid-caps dealing in foreign currencies:
Sources: bloomberg.com, cfo.com, gtnews.com, Automotive Industry Session, Spanish Ministry of Industry Commerce and Tourism, Boardmember.com.