Mitigating the Volatility of Forex Markets with eCommerce

E-commerce operations face a variety of challenges in a globally integrated economy. Competitiveness, scarcity, pricing, and the user experience are paramount. To succeed as an established online entity, a business must deliver on expectations up and down the value chain, maximizing stakeholder satisfaction, and customer utility. E-commerce operations can go toe to toe with established land-based businesses by dint of an optimized online presence. It's no mean feat getting all the proverbial ducks in a row for a product or service-oriented online entity.

Of all the topics that garnish media attention with budding e-commerce businesses, currency risk tends to get relegated to the background. It's a complex topic that requires in-depth analysis. Currency risk refers to the unfavorable risk a business faces if either end of the supply chain is engaged in the buying or selling of goods and services with foreign currency. A rudimentary example highlights the risk a business faces with forex transactions: Assume company ABC purchases raw materials from abroad where the EUR/USD exchange rate is currently 1.14. This is known as the spot rate. Company ABC sells its products and services to customers all over the world (if international shipping services are available) with prices that are denominated in a specific currency.

E-commerce operations may have country-specific websites – geolocation targeted – where prices are denominated in a country's currency. However, if excessive currency appreciation or depreciation takes place, this could affect the profitability of the company. Assume a company makes sales in euros with expected delivery at a future date of €1 million. If the prevailing exchange rate is 1.14 to the dollar, then company ABC in the US is expecting to receive $1,140,000. If the exchange rate depreciates to 1.10, then company ABC in the US will lose money and bring in $1,100,000, for a loss of $40,000 on the transaction. This is known as exchange rate risk. It can be mitigated by land-based businesses and e-commerce operations by way of futures contracts, or forward contracts. Futures are traded on an exchange and forwards are traded privately. Companies can lock in exchange rates through futures and forwards to smooth out volatility.

Practical Steps for Managing Profitability on e-Commerce Platforms

Entrepreneurs are risk-takers by nature, but currency risk is an entirely different animal. When you start a business, you are taking on a considerable challenge in a globally competitive market. No venture is possible without risk, yet currency risk is a lesser-known factor – a hidden factor if you will – that can derail profitability. It is important to be cognizant of forex-related activity as it pertains to factors of production, output, and stakeholders. As a business owner, one of the strategic objectives is to smooth out volatility to ensure that whipsaw markets do not upend business goals. An in-depth understanding of currency risks can go a long way towards this end. Whenever you conduct businesses with international partners (buyers, suppliers, sellers, stakeholders) exchange rate risk factors into the equation.

If you don't get the transaction locked in at the right exchange rate, you may have to pay more and earn less as a result of it. If you don't get the forex rate you anticipated, you are likely dealing with exchange rate risk. It's not only forex-related businesses that have to contend with this type of uncertainty; it’s any business that deals with foreign countries. Tremendous pressure can be brought to bear on your finances if your e-commerce operation is not fully equipped to deal with this matter. Fortunately, a variety of expense-tracking tools are readily available to hack these exigencies.

E-commerce operations are complex organisms that require a synergistic approach vis-a-vis integration with the global economy. Experts have heaped praise on many applications used to simplify expense tracking for businesses, such as the Beprofit app. This particular tool is one of several ranking resources (in addition to automated forex management applications) used by e-commerce operations to conduct precise profit analysis with optimized functionality and innovative computational systems. The complexities of business metrics can easily be simplified with detailed graphs and charts, courtesy of an intuitive dashboard for managing all business-related data. Currency risk a.k.a. foreign exchange risk cannot be eliminated from the equation, but it can be mitigated by way of hedging. No currency pair is immune to the perils of exchange rate risks, and this phenomenon affects major pairs, minor pairs, and exotic currency pairs too. Whenever there is a fluctuation of a foreign currency relative to your currency, a business is dealing with exchange rate risk. Like atlasfx.com different companies provide SaaS forex risk management solutions too.

To smooth out these potential hazards, companies routinely conduct the following:

• Businesses can conduct a thorough review and analysis of their operating cycle, to better ascertain where the forex risks might be. This provides a pathway for understanding profit margins subject to forex fluctuations.

• Businesses must adapt plans with clearly-formulated guidelines on how best to implement forex risk management techniques. Changes in relative foreign exchange rates can instantly impact a company's profitability via the EBITDA targets (Earnings Before Interest, Taxes, Depreciation, and Amortization). Nowadays, there are automated systems capable of managing forex activity to ensure optimal exchange rates for companies.

• In-depth analysis of income streams can provide important data which can be used for determining currency flows. Depending on how significant currency flows are and the impact they can have, it may or may not be necessary to hedge against such activity. Recall that currency fluctuations can be favorable or unfavorable.

• There are always gaps between business decisions and the impact that those decisions have on the business. During that time, businesses can negotiate purchase orders and sales, and each of these transactions is subject to exchange rate risk. Whenever goods cross borders, currencies come into play. Currency markets are dynamic; since most of the world's currencies are floating, and not fixed, exchange rate risk can never be eliminated. In order to maintain sales margins and profitability targets, companies tend to hedge to mitigate against such activity.

This article does not necessarily reflect the opinions of the editors or the management of EconoTimes