Trading beyond borders - managing your multi-currency transactions on the cloud
Type “Multi currency” on Google the first search results that come up have to do with banking products. This is perhaps a very realistic vision of how the world is a global village and how easily we purchase products and services online and deal with multitudinous money transactions.
For a modern business, fulfilling strategies often mean finding economic efficiencies in the way you run your business. We buy services where they give maximum value for the money you spent. Consumption of services and products not hosted within your home nation is normal and BAU. From a company perspective, it brings with it a host of complexities due to sophisticated compliance requirements for FOREX transactions.
And cross-border transactions are not just for large corporates, often the smaller organizations have more of these transactions that reflects their budgets for service levels required from a supplier. And, there is hardly any organization left in the world that does not serve a global clientele.
“Large international conglomerates have entire “forex” teams dedicated to managing finances across multiple currencies. As a small-business owner, you should not be trying to keep up with the second-by-second changes on your own”.
The Multi Currency transaction levels are many,
Funding Rounds (Equity)
Inter-company or overseas loan arrangements (debt)
So what should you be doing as a small business owner? Does it make sense to invest money on an accounting platform that takes care of the basics?
Here’s how Xero manages your value chain dispersed in different geographies.
Buy and Sell
With the advent of Xero, creating customer invoices and processing vendor bills in multiple currencies is not complicated. The multi-currency facility is only available with Xero’s large subscription plan, costing approximately £40 for UK based clients. This is a small price to pay in comparison to the headache you save for annual compliance formalities.
During set-up, Xero will allow you to choose your default currency. Ongoingly, the rates that are used by Xero is provided by XE.com, however, you are allowed to change it to override that with your own.
Issue customer invoices in the currency of choice and Xero will translate that into home currency equivalent at current rates. When you receive payments for the same into your home currency bank account, there is a conversion rate attributed by your bank. This gets captured in Xero when the transaction hits the books via bank feeds. Xero supports bank feeds from most major banks in the UK – HSBC, Barclays, Lloyds, Santander among some
If you use an automation software (and you should) such as Datamolino or Receipt Bank, to process supplier bills, you would be glad to know they support multi-currency too. You simply upload your bills into the software interface and allow it to convert them into neat Accounts payable in your Xero account.
Fund flows across the world are an everyday thing – as an SME you can and mostly likely have overseas investors. While you would have a common currency to negotiate, you may end up receiving the funds in another currency.
For practical purposes, when a share issue is conducted on Companies House (or its equivalent in the country of incorporation), it’s usually done in the host country currency. What should then happen to the money received Vs money shown on the transaction? The background conversion is dealt the same way as we explained above.
At the financial year-end, this has to be restated at the closing FOREX rate as per IAS 21 - The Effects of Changes in Foreign Exchange Rates.
Again, Xero being the smart software it is, this conversion is automated. So, there is no lengthy process of year end conversions.
A recommended step is to compare Xero’s conversions for year-end against the closing currency rates designated by national monetary authorities/agencies
Apart from these, there could also be debt transactions -loans from an overseas parent, borrowings from financial institutions abroad and the like. Storing the details of these transactions on Xero are simple. But the compliance requirements under specific national tax rules are a different matter.
Thinking through the issues are a starting point in ensuring that your structure these transactions appropriately, recording them on your multi-currency cloud tool should be the easier step.
Here is a summary of the best multi-currency features we like on Xero,
Track your profit or loss: Due to currency exchange, you are bound to either gain or lose. You can easily check this through your profit or loss account.
Assign currencies to your business partners: You do not have to try hard and remember which currency your clients or customers are using all the time - Xero can assign each contact its appropriate currency.
Create an invoice for one customer in multiple currencies: The ability to invoice a customer in more than one currency without needing to set up a new customer is handy
The technical bit - Xero uses three gain/loss type accounts to give a more detailed picture of a company’s financial standing. The 3 system accounts associated with currencies are;
the bank revaluation account (used to calculate the gain/loss on bank balances)
Unrealized Currency Gains Account, and
Realized Currency Gains Account (which are used to calculate the gain/loss on customer invoices/vendor bills- (Unrealized is used before they’re paid – Realized is used after they’re paid)
For more about multi-currency cloud check our dedicated service page.