Currency Case

When you are the owner of a small business, you have to exchange with many different companies and people. You have to keep in mind the different currencies from around the world, and their relation to the American dollar. For instance when you use the exchange rate 14.54 Mexican Peso's are equal to one US dollar.

With that said, say you quote a buyer from Mexico a firm price of $6.00 per metal piece on January 19th and they agree to purchase sixty of them. According to the exchange rate in order for them to buy just one it would cost them 87.24 pesos. That would mean in order to complete the entire order, they would have to present 5234.4 pesos.

If the Mexican peso were to become devalued, or go down against the US dollar, between January 19th and the time you were to ship then you would have to recalculate their bill. For instance, if it were to go down 10% the bill would increase to 5757.84 pesos. In order to prevent this from happening the customer from Mexico can use what is called currency hedging. This is the practice of insuring against potential losses that result from adverse changes in exchange rates. It is commonly used among international companies to lessen the risk associated with international transfers of funds, and to protect themselves in credit transactions in which there is a time lag between billing and receipt of payment.

There is also something called invoice factoring that can help protect the small business owner from negative consequences of currency fluctuations. Factoring firms will pay you for your unpaid invoices in bulk at a discount. This way you still are able to continue running your company and keeping all of the decision power and profits. By doing this you are protecting a job you have already done at a set price. If there were to be a fluctuation in currency you could lose much if not all of the profit from the job you already completed. You just need to be aware of the options as