Singapore
  • Hong Kong
  • UK
  1. Osome Blog Singapore
  2. An E-Commerce Seller's Introduction to Currency Risk

An E-Commerce Seller's Introduction to Currency Risk

Entrepreneurs are very familiar with taking risks. Starting a business itself is a huge risk. Risks can be valuable, but some businesses may also face hidden risks that negatively impact the bottom line if they are unaddressed.

Small things can make a big difference, and while it may not be as exciting as making the ‘big bet’ that could grow your business exponentially, having an understanding of the currency risks your business faces can help provide certainty, so you can focus on the bigger things.

If you find that accounting work is piling on and you’re scrambling to get your paperwork together, let us help you do that while you focus on bigger things. Our experienced accountants know how e-commerce businesses work and will walk you through how to optimise your accounting.

Let’s get an overview of currency risk and how you can minimize its effects on your company.

What Is Currency Risk?

Currency risk, or that thing that keeps you awake every time you make an international transaction, is the exchange rate risk that comes with doing business globally.

When you transfer money to another country, currency risks can affect your foreign exchange revenues if your money doesn’t convert into its local currency at a sufficiently high exchange rate.

The best way to think of foreign exchange risk is as the potential volatility in certain markets due to political events, economic shifts, or speculation.

While there is no official currency risk definition in the financial markets, it simply refers to “not getting the rate originally planned on.”

In other words, if you are trading currencies, your account will change in value when the market fluctuates. And if you are investing directly into foreign companies or assets, your returns will be impacted by currency fluctuations.

Understandably, this is an important concept in finance and has a strong presence across all currency markets - from forex cards to wire transfers to devalued currencies.

Why Foreign Exchange Risk Exists

Currency risk exists because the exchange rates represent a volatile market that is subject to daily changes. It is often horizontal risk, meaning it occurs between two different currencies.

The fluctuations do not only exist between two fiat currencies (such as the dollar and the euro) but may also affect a non-fiat currency. And they can be caused by the appreciation or depreciation of both the home currency or foreign currency - either independently or together.

As a business or investor, you can face exchange rate risks when the currency of the country you are dealing with fluctuates in comparison to another currency. And this exposure or threat could potentially endanger their entire investment in the foreign country.

How Do Exchange Rates Affect Businesses?

Forex risk can affect anyone who engages in international transactions due to its unpredictable nature. That's why it is essential to understand currency risk basics as you enter the global economy whether you are a small business owner, an international investor, or a student studying abroad.

Volatile exchange rates aren’t always bad for your business. Since it is difficult to protect your business against foreign exchange rate risk, here are the two ways in which it can affect your business.

Pros of Currency Risk for Businesses and Investors

When you trade in a weaker currency, you can obtain more goods and services in the same investment. It can help increase your profit margins, making your company more competitive in the market.

For example, if you are a UK-based company sourcing raw materials from Bangladesh, the fluctuation of the weaker currency can cause you to spend less on the overall product manufacturing costs.

Cons of Currency Risk for Businesses and Investors

If you trade in a stronger currency, you will have to pay more for fewer items, which can squeeze your profit margins and make competing with other businesses difficult for you. It can also affect your ability to make profitable investment opportunities.

It is also important to note that frequent negative impacts of currency risk can undo your portfolio’s progress and even lead to a significant loss over time.

Foreign Exchange Rate Management

Currency risks could be transactional, translated, or economic. While you can’t control economic risks, which are caused by external factors occurring in a country’s economic landscape, you can manage transactional and translated currency risks.

Whether you want to source goods or send money abroad, you can manage currency risk with the help of Osome's integrated accounting service and global payment partners.  

Osome is a professional incorporation company that lets you set up your business in Singapore, and helps you with your accounting needs. We walk you through the formation process step by step and equip you with the right tools to help you set up your multi-currency business accounts, so you don’t have to pay high forex charges every time you make international transactions. Speak to an Osome consultant today.

Osome Partner

This article was contributed by our partner OFX. As well as offering typically lower fees and rates, OFX can also help you develop a strategy to help protect your profit margins and create more cash flow certainty, allowing you to focus on growing your business.

Share this post:

Tips to run your business smarter.
Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

You might like it

E-commerce

When Should I Hire An Accountant For My E-commerce Store in Singapore?

Starting an online business is an exciting journey. According to the Singapore Department of Statistics, online retail sales made up 15.2% of the retail trade in September 2021.

E-commerce

How To Upsell to Your E-commerce Customers

We are inundated daily with countless ads throughout our day, both online and offline. As an e-commerce store retailer, one of the challenges that you may face is trying to get your products and message across to prospective customers.

E-commerce

Types of Business Models for E-commerce

If you are planning to start a new e-commerce business venture, this is the best time to do it! For seasoned business owners who are thinking of diversifying their business into e-commerce, you are at the right place.

E-commerce

An E-commerce’s Checklist To Prepare for 2021 Holiday Sales

Although the sales period will mean that your customers’ shopping carts will be busier, this also brings about its own set of challenges for your online business. Follow our holiday season checklist to ensure your business is well equipped for the shopper surge.

Accounting

What Important Records Must I Keep As A New Business Owner?

Good business record keeping is crucial, from managing costs for legal, regulatory or tax reasons to simply managing and improving your business. If you are just starting up your business, it might not be the first thing that comes to your mind, but it can help you build a strong foundation.

Running My Business

3 Things To Consider Before Renting Your First Office Space

If you have always been working from home for your small business and are contemplating moving to a bigger space to accommodate your staff and to have a central office location, you may be looking out for office spaces to rent.

E-commerce

Digital Payment Trends For E-commerce Sellers To Know

Today, consumers are switching from traditional payment methods, such as cash, cheque and cards to digital payment. The global pandemic has fuelled this unprecedented shift in the consumer’s behaviour.

E-commerce

Creating an Invoice When Selling on Amazon

This article helps Amazon sellers who are finding out how to create, access and share invoices on Amazon.

E-commerce

12 Ways To Drive More Traffic to Your Online Store

When your website is finally live, you want to share it with as many people as possible. How do you get people to your website and excited about your products and shop from your store?

Government Grant

Wage Support & Rental Relief for Businesses in Singapore’s Stabilisation Phase

Tighter COVID-19 restrictions will be implemented from 27 September to 21 November 2021. Find out what support SG companies can receive from this Stabilisation Phase.

E-commerce

A Design Guide for E-commerce Websites

If you’re looking to improve your e-commerce page and improve sales, you might want to learn the fundamentals of how to design a good website.

Entrepreneur's Bootcamp

Best Practice Invoicing Tips for SMEs

This article will help Singapore-based SMEs get to grips with the best invoicing practices. Take a look at the tips and how-tos to guide you toward being more streamlined and savvy.

Tips to run your business smarter. Delivered to you monthly.

You'll receive a verification email you'll have to open and confirm the subscription.

We’re using cookies! What does it mean?