The effects of currency exchange on international business
With the invent of transportation and information systems, we have made the world a much smaller place. Businesses are expanding their operations across borders everyday and things can be moved across the planet within 24 hours on jet planes roaring across the skies. Freight trains move relentlessly day and night on carefully woven webs of metal tracks.
As companies increase their interaction with other countries, there are many things to consider. Increased commerce across international borders brings more risks for businesses. These risks include having to deal with and understanding political structures, economics, and cultural diversity of other countries. All such things can be devastating if business managers do not have the knowledge to deal with those issues carefully.
Currency exchange and profits
Before there was modern technology to move information across the globe within seconds, currency exchange was a major issue. Now days, McDonald’s can translate Rupees (Indian currency) into US Dollars almost instantly using the currency exchange rates. Nike can collect payments in Euros and have their bank pay out in United States Dollars.
Although currency exchange methods have made it simple for businesses to operate abroad, fluctuations in currencies can become obstacles to continued growth. This issue must be paid more attention, especially by newer managers that are spanning their operations in countries other than their home.
Some events are outside the control of an individual or any organization. Consider the fluctuations in currency exchange when a nation goes into great debt, or there is significant inflation or deflation. If you are operating in a country faced with high inflation rates, their currency is going to be devalued quickly. Your income is going to be significantly effected if you convert the currency of such country into another.
Imagine that you are forecasting sales numbers for the year 2010 for your operations in Zimbabwe (although I am not sure anybody would want to do that). Their inflation rate is in the tens of thousands of percent. How would this translate into profits for your business once you have exchanged the currency into another?
The point is not to scare you to not expand your businesses into other countries. The point is to be more alert about what is happening in the political, economical, and cultural scene of the country your organization operates in or wants to operate in. With so many other things to consider while thinking about expanding, it is easy to overlook the impact of currency exchange on your profits.