For most U.S. business owners, it makes sense to put foreign invoicing and receivables in U.S. dollars. It’s simple and manageable. However, in today’s volatile foreign exchange market, this strategy may not be the ideal option for a number of reasons. As a result, the decision to invoice foreign customers in U.S. dollars should be reconsidered in light of recent trends.

At first, it appears obvious to conduct a transaction in USD. Your company is in the United States. Your liabilities are in USD. Your accounting and ERP systems are denominated in U.S. dollars. Shouldn’t your foreign invoicing and receivables should be in USD as well?

The surprising answer: most likely, no. Your efforts to streamline your administration may be costing you money and making your customers’ lives miserable, as well as more expensive.

Put yourself into your customers’ shoes. They receive your invoice and make a note to deal with it when it comes due. Between now and then, like you, they are focused on running a business. Typically nothing is done with the invoice until the due date arrives.

However, when the date does arrive, customers often realize that the value of the U.S. dollar is not where it was when the invoice was first received. Not surprisingly, volatility is the only thing you can count on in the foreign exchange market, and this past year it has been particularly exceptional in that regard. Some 30 day spans saw USD appreciation of more than 7 percent, which considerably increases the cost to your customer’s USD invoice.

Slippery Slope

As a sort of mini-case study in relating to your overseas customer’s pain, consider the price of oil. Priced globally in USD, oil is a commodity whose price serves as a de facto barometer for expected growth. Even if you don’t buy foreign goods and services or travel abroad, you still are impacted by price swings in the currency.

Much like the dollar, oil has been fairly unidirectional with respect to its movements over the past year. According to data from the U.S. Energy Information Administration (EIA), the price of oil has gone from roughly $100 per barrel in April of 2014 to approximately half that price today. This is great news for U.S. consumers. However, overseas consumers have felt less of a boost when the effects of currency swings are factored in.

Though largely correlated, the price of oil has not fallen as significantly for consumers in the developed world. Beginning in fourth quarter of 2014, the buying power of foreign currencies began to decline sharply, at least on a relative basis. The first quarter of 2015 is arguably even more telling for our purposes. During that period, the price of oil more or less flattened out around the $50 level while the Dollar’s volatility continued. By the end of the first quarter in 2015, a trade-weighted unit of foreign currency had only 40 percent of the buying power it had one year prior.

For fear of digressing into an analysis of the oil market, substitute your product into the above scenarios. The rising value of the dollar has obviously made acquiring those the U.S. currency a more expensive proposition for foreign buyers. But there are other, perhaps more damaging effects that come along with it as well.

Certainly, the reverse scenario under which the Dollar decreases in value might put a little extra money in your customer’s pocket, but the administrative burden and cost of acquiring USD, as well as the risk and stress associated during the period between invoice issuance and settlement, still resides on your customer’s shoulder regardless of exchange rate movements.

Better Mouse Trap

Assuming you are still in your customer’s shoes, might you favor a vendor that alleviates this burden? Perhaps there is no product or service in the marketplace that would serve as an adequate alternative for what you are importing. Perhaps there is no local substitute and you are willing to let your vendor in the United States dictate the terms under which you will trade.

Back in your own shoes — if you are in the majority and deal with competitive pressures and threats every day, it’s worth considering better ways of doing business. Airlines, banks, cable companies, and credit card companies notoriously have the luxury of bullying their customers. Most likely, you do not have this bargaining strength. Any step you can take that makes it easier for customers to do business with you is a step that should strongly be considered.

What are those better ways? Leveraging available resources to invoice in your customer’s local currency and hedging that exposure upon issuance. There are available tools that allow for local currency invoicing, as well as hedging foreign currency exposure. And there are tools in the marketplace that streamline customer communication. Soon, there will be services that combine all of the above.

Exploring these tools available, and being open to evaluating and changing your practices is certainly worthwhile. This action also is a responsible action that can be taken to ensure your company’s well-being, and the well-being of your customers.


Peter Clifford
About The Author Peter Clifford
Peter Clifford is the Co-Founder of TRSRY, LLC., an early stage financial technology company specializing in foreign currency hedging and payment services for corporations.

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