Fluctuating Exchange Rate impact bottom line
The travel industry is an international business with FX movements having a direct impact on bottom line, exposing the businesses to economic uncertainties and making it difficult to protect your projected profit margins. Travel Agents and Operators (TA&Os) are normally in a position to have a specific FX focus and target market, yet FX can eat into your travel business profitability through Costs, Risk and Time.
Costs involved with FX transactions
All businesses should be cost conscious, especially when FX deteriorates the profit margins. When making FX Payments through a bank, or via credit card, transaction fees occur, which gets automatically charged to your account. Dealing with such kind of multiple payments throughout the month can accumulate to a substantial amount of money that could be injected back intothe business. hat is why businesses that decide to de-emphasise cost-control can end up with a short life expectancy.
This cost-management need applies to currency exchange transactions as well. After all, why should you pay anyone more than you need to for foreign exchange services?
Having the right FX Broker can help reduce costs in both fees as well as the FX transaction. This is because the banks and credit cards apart from levying a transaction fee for foreign exchange, tend to take a large percentage in the conversion rates. A FX broker, therefore, will not only help with your business cost, but also reduce the risks that are involved with Foreign Exchange and the Live Markets.
Risks Created by FX
Foreign exchange creates several kinds of risks that impact any company conducting international business. If I were to analyse what risks specifically impact TA&Os, they would be:
- Incoming FX Risk
- Outgoing FX Risk
- Receivables Risk
Incoming FX RIsk
Incoming risks are the effect of cash flows from overseas operations, which fluctuate with live currency exchange rates. For example, as a Travel Agent or Operator, you will receive payment that will need to be converted into AUD for your clients abroad. When the foreign currency weakens or the AUD strengthens, the conversion will give you a lesser AUD amount. This in turn affects the profit margin for the entire transaction.
Outgoing FX Risks
Outgoing FX risks can impact the business a lot more due to dealing with multi-foreign currency conversions. Outgoing risk normally occurs due to the time difference between when a transaction with a client is made, and when the payment to the supplier is made. The exchange rate between currencies may have significantly changed during that time, meaning the cost in the company’s home currency is greater than anticipated. For instance, if you are taking care of a multi destination trip package for a client, not only are you dealing with numerous suppliers and vendors, but different currencies as well. Each of those currencies has a different impact on the AUD.
Having a FX Broker minimises not only the time to organise these multi payments to your vendors, but it can also minimise the loss of profits. Being able to have a broker book the best rate for your business, and provide insight to any FX impacting announcements or trends in the market for each separate currency, will show immediate savings to your bottom line.
Receivables Risk
Companies experience receivable risks when cash inflow reacts differently to currency rates than their cash outflows. These risks can impact the company’s cash margin on sales, and possibly resulting in an overall negative cash flow. This can be managed by waiting for the AUD to go the opposite way before converting the payments to AUD. However, if cash flow is required on a regular basis to sustain operations, the amount of funds received will make a long term difference for the business.
Travel agents and operators are exposed to all of these kinds of risks. Customers frequently pay their travel agent in their home currency, with the agent in turn converting and settling the amount with the travel provider.
Managing FX Risk
Foreign exchange risks can be managed typically through - a) locking in agreed upon rates or b) participating in transactions to hedge risks and reduce the impact of changes in exchange rates. Forward contracts, options and derivative transactions lock in specific rates, and guarantee the ability to buy and sell currency at specific rates for a future date. The disadvantage of these contracts is that they can be complicated for a travel business to set up, track and manage.
TA&Os may choose to purchase and hold foreign currency in advance to make direct payments in local currency, without being affected by the exchange rate at the time of payment.
Having a FX dealer manage risk, allows travel companies to pay suppliers in local currency with ease and avoiding unnecessary costs. A travel company can organise the payment to their suppliers with significant savings, and lower fees within a 24hr turnaround.
Having a reliable FX broker will give you peace of mind, as they are on top of the FX markets, and play a crucial role in efficient FX risk management. This allows travel businesses to focus purely on their own operations and growth.
Managing cash flows is an important part of any business, especially the travel industry, wherein multi-currency management is the norm. Incorporating payment methods that reduce the impact of fluctuating exchange rates, as well as avoiding unnecessary fees can be an important contributor to a travel company’s profitability.
Beyond facilitating international payments and cutting costs on these transactions, be sure your FX broker provides AML/ CTF protocol protection, to help minimise against fraud, which can be a bigger risk whilst dealing with overseas businesses.
“We have recently started using Tat Capital for all our FX needs. The system is user friendly, and the rates are far better than what we have found with not only banks, but also other FX platforms who offer a similar service. The process is simple and fast, with funds usually arriving in half the time of that of banks. It has removed a lot of admin work from our side and we are seeing larger margins in our sales due to fantastic exchange rates. Having a team on-hand to answer any questions immediately is also a huge help. We would highly recommend Tat Capital. “ - Boutique Tour Operator
TIME IS MONEY...
Dealing with FX payments in any business is a role in itself. Not only are you trying to manage your business P&L, but you are also trying to manage FX market volatility. Being a TA&O, the transaction doesn’t end with the client. You liaise with many suppliers and vendors around the globe to give your clients the best experiences, apart from getting the best cost effective deal to increase your profit margin.
A good FX Broker watches the markets regularly, and has access to competitive rates for their clients. Along with this, they should have the ability to provide secure multi currency payments.
Customer service is paramount when it comes to dealing with a broker. Remember: they need you, not the other way around. If you do not see a clear route to contact someone at the brokerage on the website, this should be a huge red flag when it comes to availing their services. The professional firms will have several different ways to contact them including phone, email, live chat, and many others. If you ever run into a problem, the last thing you want is face an issue in getting hold of your broker to fix it.
TatFX is a fast, simple and cost-effective solution to moving funds internationally.
TatFX is an independent FX service provider, enabling corporates and family offices to manage currency risk, increase profitability and improve operational cashflows.
Foreign currency payments are a vital part of any trading business whether importing, exporting, manufacturing or outsourcing. Our ability to aggregate wholesale pricing from a network of global banks allows you to pay overseas at a far more competitive FX rate, with lower fees and ultimately higher profitability.
Receive foreign currency in our segregated foreign currency trust accounts held at APRA-approved banks, allowing you to export to international clients and enter new markets with greater flexibility, without incurring the cost of opening your own FCAs.
Manage foreign exchange risk. Lock in future exchange rates through forwards and options enabling you to reduce the impact of FX volatility on earnings and thereby increase cashflow certainty.
Support and simplicity of having a secure online dealing platform, and a professional FX account manager to keep an eye out on the FX markets, giving you the freedom to focus on running your business.
Secure online platform. Book FX deals, make international payments and manage multi-currency balances using our purpose-built FX and payments platform. While major banks use the platform internally, TatFX clients can access this 24 hours a day.
Execute complex cross-border transactions leveraging our global network of banks, liquidity providers and partners.
High volume batch payment processing is ideal for international dividends, payrolls and rental returns, allowing you to save on multiple transaction fees, large FX spreads and eliminate labour & input error.
