New Zealand is a great place to do business and consistently ranks at or near the top of annual lists put together by the likes of Forbes and the World Bank when it comes to ease of doing business. It’s also a small market and that means local businesses in search of growth often look overseas.
Trading overseas, either through exporting or setting up shop off shore, brings with it a number of new business challenges that can vary from territory to territory.
But there’s one aspect of trading overseas that all New Zealand-based businesses need to come to terms with no matter what logistical efforts are involved — foreign exchange. We talked to BNZ commercial banking partner, Tim Wixon, to find out more about how to make dealing with foreign currencies work for you.
When it comes to dealing with foreign currencies and the inherent fluctuations involved, Wixon says there are three important facets to running an efficient overseas operation from New Zealand; setting an FX policy, having a strong understanding of your forecasts and, lastly, a solid grasp on the payment flows in and out of your business from overseas.
Setting an FX policy
“When someone comes to us and says ‘we want to expand overseas’, the first questions we ask of them are ‘where, why and how are you going to do it’ and ‘what are the funding implications’,” says Wixon. From the bank’s point of view the first step is always to sit down with a customer and figure out a game plan that’s specific to each individual business.
“Everything is super client dependent,” he says. While there’s no ‘one-size-fits-all’ solution, setting a policy should be the first step.
“Having a foreign exchange policy in place is something every company should have. It’s plain good governance and de-risks the CFO’s role somewhat because it gives them a rulebook to play with. For any clients that question the value of an FX Policy a key question we always ask is ‘are you a speculator on FX or are you an exporter?’, and the answer is always that you’re an exporter,” says Wixon.
Creating a policy doesn’t have to be overly complex, says Wixon. “It could be as simple as having a policy that says your company is going to lock in 50 percent of forecast revenues from the United States. For example, if you have $1 million in revenue, you can say with complete certainty that $500,000 of that is going to provide this much in New Zealand dollars, while the rest you do not convert into New Zealand dollars at all, but remains in that foreign currency and can be utilised for costs in that same foreign currency or converted to New Zealand dollars at a later date.”
The point here is that this approach gives your business a degree of certainty that otherwise wouldn’t exist. “It’s not much different from what you do with your home loan,” says Wixon, “you might have some floating, some fixed, depending on how much certainty you need in terms of cashflow”. All of this plays a role in helping a business forecast revenue.
Understand your forecasts
“By having some certainty around foreign exchange, businesses can forecast a lot better — you’re effectively locking in a price that you can plug into your forecast models and understand where you’re going to be revenue-wise,” says Wixon.
“This, in turn, can often help with increased access to bank funding to help support your export growth.”
Know your payment flows
With a policy in place governing your tactics, it’s time to think about the next part of the equation, and that’s the process of actually getting that money back to New Zealand and understanding how money flows in and out of your business.
“We can help with all the foreign exchange cash flow,” says Wixon. “We set up foreign currency accounts in New Zealand and a company can utilise those foreign currency accounts to hold a wide range of currencies and pay away funds as needed.” Wixon points out there are a number of advantages to this, not least of which is the ability hold the money without converting it. Reason for not converting might be because you’re waiting for a more favourable exchange rate, or in case you need to make a payment in the same currency.
“You don’t want to be exchanging money back and forth more than you really need to because there are costs involved every time this happens” says Wixon. “It’s all about sitting down and working out what all your flows in each currency look like.”
Work closely with your bank
Talking to Wixon it becomes clear that a hands on approach is best. He says banks have strong overseas networks and that it’s worthwhile taking full advantage of these. “It’s really about us facilitating a conversation in order to get a deeper understanding of a business,” says Wixon. “We recommend businesses bring their advisors along with them so they’re part of the same discussion.”
Wixon finishes by emphasising the importance of having good modelling so businesses expanding overseas have a solid view of what their foreign exchange exposure truly looks like.
BNZ has supported the Deloitte Fast 50 for three years and we support 21 of the 50 fastest growing companies in New Zealand. Find out more about our solutions for international payments and transactions.
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