The Great FX Waste: How SMEs Are Wasting Good Profit Margin On Bad Foreign Exchange

Tony Crivelli
September 20, 2021

Key points

  • SMEs in Australia are still paying too much for their foreign exchange in markup to banks, wasting on average $750 on every $25,000 invoice. 
  • SMEs waste on average $5,000 per annum by betting on the Australian dollar and hiding their wins and losses in their operating margin.
  • Accountants to these SMEs are left to clean up messy or hidden foreign currency gains and losses, usually for free. 

Based on my extensive research, I've found that SMEs in Australia are wasting up to $20,000 per year on their foreign currency – they just don’t know it. Here is a way for me to showcase how this happens through a story about a guy called Wasteful Wally. He may sound familiar.

Wasteful Wally runs a great wholesale electrical business that made over $1m in sales last year. He enjoys a really good profit margin and he’s ‘lucky’ because he is able to slightly increase his prices nearly every year and his customers just accept it. 

Wally imports some of his electrical products and therefore needs to buy about $250,000 in USD each year, but he doesn’t have an FX problem. He just buys the currency on the day of the invoice payment and accepts the exchange rate for what it is. He sometimes thinks he’s not getting a great deal from his bank, particularly when the AUD has dropped a lot, but it just seems too hard to shop around. It’s not like he can do anything about the rate anyway, so he just carries on as usual. 

The usual: whenever the invoice is due, just use the bank’s exchange rate on that day. 

Of course, when he does lose a bit on the exchange rate (because that’s inevitable), he simply absorbs it in his healthy margin and thinks about putting his prices up next year to make up for it. As long as there is no one else who can import the same electrical light switches from the same factory in China and sell them for a cheaper price, Wally’s all good. 

In fact, business has been so good he may even sell up in a few years; cash in and semi-retire. Maybe do a bit more of that share trading and property development that he loves. 

Sounds pretty good, right? Things are working well. Except, they’re not and they could be doing so much better. Let’s look at the waste within Wally’s current plan. 

The First Waste: FX Markup

Last year Wally lost $11,661 on fees and margin alone because he only buys USD from his bank.

Interested Irene, Wally’s much smaller competitor, is new to the wholesale electrical business. Irene still has her bank facility but she mostly uses a fintech company that gives her cheaper rates on her USD’s and their fees are lower too. Her margins are tight as she keeps her prices low to grow her customer base, but her FX waste management - short and long term - is kept to a minimum thanks to her varied supplier strategy. 

The Second Waste: Realised Foreign Currency Loss

Wally chalked up a $2,331 loss in his Foreign Currency Gain and Loss account last year, which his Accountant had to post to his annual Profit and Loss account. Not great. 

Wally uses Xero for his accounting and when he places a USD Purchase Order with his supplier in China, he doesn’t put it in his system straight away, which isn’t the best idea. Unbeknown to him, his accounting system allocates a rate on the day and records to AUD the cost of that invoice whenever he enters it into Xero. 

When Wally finally gets around to paying the USD invoice each time, the rate is never the same.

This usually creates a realised FX loss that must be recorded in the financial statements. 

The Third Waste: Unseen Foreign Currency Loss 

Last year, Wally lost a further $6,382 because of the way he approaches his business’ FX. 

By just buying on the day (called Spot), Wally is effectively at the mercy of the currency market and its wild fluctuations. The AUD is notoriously volatile and last year was no different. The difference between the high and low was a massive 34%, or a staggering $64,000 Australian dollars on a $100,000 US dollar invoice. 

While Wally only lost $6,382 on the exchange rate itself, it could have been much worse.

It's mostly luck that prevented Wally from losing a lot more as no one kept an eye on the AUD cost of his USD invoices. 

The Great Waste and The Great Remedy

In total, Wally wasted over $20,000 last year, a substantial amount of money that could have gone back into the business or into his pension pot. 

It’s clear that SMEs need more expertise when it comes to buying foreign currency for their business, either through their own volition or via their accountant. 

This doesn’t mean getting into the business of currency trading and reading up on all the trade secrets (by the way, there aren’t any), but rather using technology that taps into the power of their foreign invoice data. They already have the data, they just need to use the technology. 

A simple currency risk management tool like Currency Score that plugs into an accounting or ERP system, or that can work with a CSV file, is the start. By utilising their readily available data and seeing international invoices in a way that allows them to understand what currency markets are doing to their business, SMEs and their accountants can do something about it.

What can they do about it?

  1. Look back at the effectiveness of past currency purchases.
  2. Look forward with a new currency plan built with simple-to-use software.
  3. Put the new plan into action, letting technology do the heavy lifting of keeping an eye on the rate. 

All organisations, not just the big corporations, should be using technology to see if they are getting the right rate for their business, every time. Fluenccy enables this. 

If Wally sounds like one of your clients (or he’s you), he and his finances might not be ‘all good’ at the end of the day. But there are changes - easy changes at that - that can be made to stop wasting so much money needlessly and unknowingly. 

Who wouldn’t want to save on costs and fees, and to increase margin without any great change to the invoicing process?

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