Fluctuations in exchange rates can affect the profitability and cash flows of companies.
Learn about the strategies that companies can use to manage exchange rate risk.
In 2023, the upward trend in Spanish exports will continue , although at a more moderate pace, in line with the international situation. In addition, the trade deficit is declining.
More and more SMEs are expanding the boundaries of their business and embarking on the adventure of opening new markets abroad , which is why foreign currency czechia email list is increasingly used. Some companies even resort to financing in currencies other than the euro or start investing in countries with another currency.
Companies that use foreign currency in their foreign trade operations (COMEX) must take into account that fluctuations in exchange rates can have a direct impact on their profitability.
Start of marked textSHARE IT! How does the exchange rate affect your business and how to manage it? Discover key strategies to minimize risks and maximize opportunities.End of marked text
Consequences of currency devaluation
When a currency depreciates against the euro, revenue generated in that foreign currency will translate into fewer units of local currency. This can reduce profit margins and negatively impact a company's financial results.
On the other hand, if the national currency is devalued, the foreign currency becomes more expensive. Therefore, imports become more expensive and foreign products become more expensive. The other side of the coin is that our products are cheaper because the currency is devalued and exports will increase , since, according to the law of supply and demand, trade will always prefer products and services with a lower cost. In addition, tourism increases, since traveling to a country with a devalued currency is cheaper.
How does the exchange rate affect cash flows?
In addition to profitability, fluctuations in exchange rates can also affect a company's cash flows . For example, when a company has accounts receivable in a foreign currency, a sudden depreciation in that currency can reduce the value of those future payments when converted into euros. This can lead to liquidity problems and difficulties in covering operating costs.
Risks associated with exchange rate fluctuations
Exchange rate fluctuations pose several risks to businesses. The main risk is foreign exchange exposure risk, which arises when businesses have assets or liabilities and income and expenses in foreign currencies.
Foreign exchange exposure can be of three types:
Transactional, relating to the effects that unforeseen fluctuations in the exchange rate have on deferred collections and/or payments in foreign currency.
Operational, referring to the impact on future cash flows, both those denominated in foreign currency and in local currency.
Accounting, refers to the impact of exchange rate fluctuations on the Consolidated Financial Statements.
The combined effect of transactional and operational exposures is often referred to as economic exposure.
