How Your Business Gets Affected By The Exchange Rate Movements?

foreign exchange

With the advent of Amazon and e-commerce marketplaces, geographical borders are a thing of the past. Today, anyone can sell anywhere in the world as long as they can find a buyer. Small local businesses from Pakistan, Bangladesh and other third world countries have been selling their local products on the global online marketplace to literally the whole world. Even though the logistics process has been made extremely easy by global ecommerce marketplaces like Amazon and Alibaba, as a business owner you still need to be cognizant of the exchange rate fluctuations that can directly affect the profits of your business.

Today, exchange rates for most currencies are determined in the foreign exchange market through the forces of demand and supply. A variety of factors can cause exchange rates to rise or fall. In order to better understand what are the factors that affect exchange rates, read our detailed article on the causes of exchange rate movements (hyperlink).

When conducting global trade, payments are usually made in US Dollars as it is the currency of global trade; OR in the native currency of the buyer. So, if you are selling your product or service in the Japanese market, all payments will be made to you in Japanese Yen. In this article, we dissect the effects of exchange rate fluctuations on local businesses in a country.

EFFECTS ON EXPORTERS:

If you are exporting your goods and services overseas, there is a direct impact on your business of movements in the exchange rate. When the exchange rate appreciates, your exports will become expensive in the foreign exchange market as people will need to pay more dollars for your goods or services.

Let’s take a simple example. Imagine you are selling a product for 5000 Pak Rupees (PKR) and 1 US Dollar costs 100 PKR, your product or service is being sold at US$ 50. If the PKR to US Dollar exchange rate appreciates to 90 PKR, the same product or service will now cost your buyer US$ 55.5. So an exchange rate appreciation results in your goods and services getting expensive and less competitive in the global markets. In such a case, business owners can choose to cut their profits or further decrease costs by compromising on the quality of their product or service.

Similarly, exchange rate depreciation will allow your goods and services to become cheaper in the global market. If the dollar depreciates from 100 PKR to 110 PKR, your good or service will now cost 45.45 dollars in the global market. Hence, depreciation results in your exported products become more competitive in the global market and appreciation results in exports become less competitive in the global market.

EFFECTS ON IMPORTERS:

Exchange rate movements also have effects on businesses that import their goods and services. If the exchange rate appreciates, imports will automatically become cheaper.

Let’s take a simple example. Imagine you are importing laptops from USA and selling it in the local market of Pakistan in Pak Rupees. Each laptop costs US$ 1000. In case of exchange rate appreciation of the PKR from 100 to 95, the import price of a laptop decreases. Instead of PKR 100,000, the import price of each laptop will now decrease to PKR 95,000 which is a benefit for the local businesses. Similarly, exchange rate depreciation will lead to imports becoming less competitive.

EFFECTS ON OTHER LOCAL BUSINESSES:

Exchange rate movements can also affect businesses that are not in the import or export business but use imported raw materials.

A simple example will be a local social media company that hires graphic designers from the international freelance market. In case of exchange rate appreciation, the cost of the graphic designer will decrease as the company will now have to forego less PKR to pay the same amount of US Dollars to the graphic designer. The cost of production for the business has decreased and the business now has a choice of earning extra profit or decreasing the cost of their service to make it more competitive. Whatever choice they make, the business is eventually better off.

Some countries like China keep their exchange rate depreciated in order to give an advantage to local industries to compete in the foreign exchange market. Moreover, a depreciated exchange rate also discourages imports with elastic demand and incentivizes local industries to use locally produced inputs for their goods and services.

All in all, exchange rate movements affect local businesses more than they care to acknowledge and as a local business owner if you are able to foresee the fluctuations in foreign exchange market, you can exploit the situation in your own favor by employing innovative solutions like fixed contracts or stocking foreign currency for future transactions.

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