Australian businesses, like any other in the world, want the most goods and services their money can buy. When purchasing raw materials or importing finished goods, the price influences the profit margins on both sides of the transaction. Currency valuation is crucial to international trade, and tracking the exchange rate from one day to the next can determine the profitability of an import or export of a contract.
Goods-Based Transactions
Goods-based transactions must incorporate additional factors: The cost of transportation and the cost of overseas assembly affect total costs. Not only the exchange rate of the currency involved is considered, but so is the cost of doing business in or via another country.
Most business transactions require transportation of goods—how the raw materials or the finished goods will get to the receiving organisation’s location. Truck or rail transportation to a shipping point and the ship transportation itself must be coordinated. Financial compensation for those services also involve currency valuation and exchange rates.
If the importing company operates overseas manufacturing plants to generate those same products, wages, taxes and other financial considerations also incorporate the values of the domestic currency and the international currency involved.
Service-Based Transactions
Using the above scenario, service-based transactions involve currency valuation and foreign exchange. The trucking company who charges for the factory-to-port transportation often charges in their local currency. The shipping company that owns the cargo ships often require payment in either local currency or in US dollars—the standard currency of trade.
Using a broader scenario, service-based companies can employ people in more than one country. International corporations have local branches or divisions within local economies. Negotiated contracts with local branches and divisions take into consideration the local currency. Omitting the currency valuation between the outreach division and the home branch could spell financial disaster if a contract is accepted when currency valuations are disproportionately unfavourable.
Considerations
Because currency valuations change quite often, both service- and goods-based companies endeavour to lock in the best rate or the worse-case exchange rate at the time the contract becomes valid. Some may attempt to allow for lesser costly exchange rates if the rate tilt in their favour later.
When business transactions involve organisations in more than one country, the timing, terms and conditions of a contract with the most favourable currency valuation are points that should never be overlooked.
