In 2019, the European Commission found that 82% of European SMEs promoted their products and services online. The pandemic has further pushed the importance of businesses having a digital presence and in many cases, it became a lifeline for their bottom line.
The SMEs’ online presence has meant a shift away from the traditional Global Value Chain model they couldn’t previously access, making it easier to reach both new customers and suppliers across regional and international borders.
But, with cross-border trade also comes managing fluctuating foreign exchange rates and invoices.
Based on our internal research, of the many large, medium and small businesses in the FX game, only 40% have a good handle on it of which, 90% are large corporates. These businesses have specialist software to continuously update them on how much foreign currency they have and how much they still need. They also have in-house expertise ensuring they buy the right amount of currency, at the right time, from the best providers.
Currency Score is here for SMEs and startups to get the same FX business insight, showing clearly and simply their foreign currency mark up and average rate, and any FX savings made so far against the benchmarks. All for free.
A currency score is a measure of how effective a business has been at buying or selling foreign currency as part of their international payments. Similar to a credit score, the higher the score, the better they’re doing.
For SMEs and startups, the likelihood is that they're getting a below average deal on their rates because they default to using their banks, or they are buying the foreign currency at the time payment is made. This common but ineffective approach will result in a low currency score.
While the foreign exchange rate is important, we also take into account several other factors to create a currency score that reflects the unique needs of a business.
To be effective at managing foreign exchange currency, here are the things to know:
In the decision to buy (or not to buy) currency, all of these factors are essential to getting the best rate possible.
Currency Score is securely integrated with a business’ Xero account to pull their relevant data and bring it into a single number that’s compared to an industry benchmark, making it easier to understand.
The industry benchmark used in Currency Score uniquely and accurately compares how a business is doing by analysing their currency mark up, their customers, competition and business objectives. SMEs often use the interbank rate (used by international banks to transact with each other) as a benchmark to establish their FX gain or loss for the year. However, this is a flawed approach as this rate is unachievable by even the largest of businesses.
With the five factors listed above for successful foreign currency management and the business data, our benchmark algorithm produces an average historical rate that represents what an expert would have achieved for their business. This is what the comparison is against, keeping it all relevant to the SME.
The score is out of 850 because this allowed us to have the right balance of score sensitivity for startups and SMEs doing less than $100k per annum right up to those doing $25m+.
For those just getting started, a score that moves by 50 points won’t be too concerning as it might mean a gain or loss of around $100. But, for SMEs doing around $25m in international payments, just a 10 point change in their score could mean a $5,000 opportunity.
As a temperature gauge on scores, we say:
The majority of startups will likely have a score below 500, which represents a good opportunity to make simple changes for a better rate, a better score and ultimately, better savings on their foreign currency. That’s the end game, after all.
Improving their currency score brings peace of mind to business owners. It shows smarter planning, greater savings and more predictable numbers for the business to work with.
Over time, their currency score can also serve as a guide to future FX buying decisions. Much like a personal currency expert, the score keeps an effortless eye on the rate and business requirements.It automatically indicates when changes need to be made (a reducing score) or if the right decisions are being made (an increasing score).
As expected, improving a currency score is about buying currency at the right time and from the right place. It’s that simple but, as we all know, not always that easy.
Let’s start with the easier one.
While there are plenty of comparison sites like FX compared and Margin Expert that’ll show who is the cheapest on the day, it’s better to buy from a mix of providers for the sake of creating good competition within the market. This might mean buying portions of foreign currency from the bank, a well-established non-bank financial institution (NBFI) and a modern fintech company; this might seem like quite a bit of extra work right now, but don’t worry - keep an eye out for Fluenccy’s next product coming soon that’ll automate this for you.
The combination of providers helps to reduce the foreign currency mark up, which will automatically make savings.
Like most things involving financial risk, finding the right time to buy the best FX rate isn’t so easy to assure. Instead, we like to reframe the entire question of timing to make it less abstract and mystical.
When considering the best foreign exchange rate, asking what the right rate for the business is, will be the ultimate guide. Maybe this is $1.32 given the projections for international payments, the business objectives and the risk appetite of the business owner? Or maybe this is too high?
Going back to the fundamentals of the business itself (profit margin, customers, competition, objectives and owners), defining a realistic and achievable rate and achieving it, is the key to improving their currency score.
It’s all in the data. Currency Score makes it easy by integrating with your Xero platform at the click of a button, to pull all invoices and payments relating to foreign purchases. So, the first thing to do is to make sure all invoices are in your Xero account.
From here, a review and assessment needs to be made on what the business’ foreign currency needs have been and what their needs will be in the future. By calculating the average rate so far and considering how well this aligns with the best rate for the business, it’ll become clear how good performance has been.
If you want to make this entire process more seamless, effortless and completed in just 5 minutes...