Our currency has been very volatile the past few months. This week’s article focuses on managing your company’s finances and cashflow particularly if you are an importer or exporter of goods, and deal in other currencies besides Ringgit.
The first thing to do is to learn more about hedging your foreign currency exposure, ie minimize the risk of losses from foreign-currency transactions. For importers, any decline in Ringgit vs other currencies will mean you have to pay more when you import, while for exporters, any increase or improvement of the Ringgit vs other currencies means you will earn less when you export. Most companies hedge this risk by obtaining a Forward Foreign Exchange (FFE) facility with their banker. There are 2 types of Foreign Exchange facilities that local banks offer:
1. Spot Foreign Exchange facility – which is essentially an on-the-spot money changer facility that exchanges Ringgit with foreign currency at the current rate. This does not provide hedging in volatile currency situations
2. Forward Foreign Exchange (FFE) facility – this allows you to lock in upfront an exchange rate for your foreign currency transaction for a future date. There is no upfront cost payable to your bank for this facility. How does this work? Example: Say that your business has dealings in US Dollars, and the RM/USD exchange rate is currently RM4.10 per USD1.00.
2.1 If you are an exporter, and you have payment due from your customers in 3 months’ time, and you think the Ringgit will strengthen vs the USD, ie drop below RM4.10/USD in 3 months’ time, then you can use the FFE to lock in a contract with your bank for RM4.10/USD for the amount you expect to receive from your customer in 3 months’ time. So 3 months later from today when your customer pays you in USD, the exchange rate you will get from your bank is RM4.10/USD. Of course, if the Ringgit falls further after 3 months, then you stand to lose out as you are obliged to convert your sale at the RM4.10/USD rate.
2.2 If you are an importer, and you need to make payment to your supplier in 3 months’ time, and you think the Ringgit will weaken vs the USD in that time, then you can use the FFE to lock in a contract with your bank for RM4.10/USD for the amount you need to pay to your supplier in 3 months’ time. So 3 months later when you need to make payment, you will be paying at an exchange rate of RM4.10/USD, regardless of what the exchange rate is at that time.
Whether or not you decide to use the FFE facility depends on your priorities. Most companies which use FFE facility do so because:-
1. They want to lock in their costs/ sales at rates that they know and can calculate beforehand, and not wait to see what the rate is in the future to see whether they will make a profit or loss.
2. They don’t want to deal with uncertainty of foreign exchange and are willing to take a chance at the rates going against them.
If this is your first time approaching your banker to explore Foreign Exchange facility, do get your banker to also explain other financing methods such as Letter of Credit, Trust Receipt and Bankers Acceptance to you. These are collectively called Trade Facilities, and are at much cheaper rates than your normal Overdraft or Revolving Credit facility. Your banker is likely to offer you some or all of the above Trade Facilities together with the Foreign Exchange facility, as they will also get to earn some commission from your utilizing these facilities.
Have a profitable week ahead!
The Familybiz Works Team.
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