Foreign Currency Exchange Rate That Impact The Profitability Of The Company

Small businesses such as Alliance Design Concepts are great examples that shows a fluctuation in the foreign currency exchange rate that can impact the profitability of the company. Small businesses have to understand the risk when they doing business on an international level. Very often the exchange rate value will not work in their favor. In case with Alliance, since they were using an international supplier, they needed to make sure they have converted all the cost of equipment from USD to CAD. The exchange rate fluctuation caused a direct 8.2 percent decrease in the pre-tax margin on the equipment for Alliance. In the same way Macdonald’s sales in Europe increased in 2011, however the yearly profit went down as a result of the weakening euro. As as result of even small fluctuations in the exchange rate, it can cost companies to lose in the return on exchange. In my opinion, small business such as independent travel agencies can fell the most impact when of the exchange rate floating. Travelers from and to foreign countries have to convert money to that particular country’s currency so they can have enough funds to visit places, stay at the hotel, and do other things. When the USD appreciates against euro or other major currency, American tourist will be able to enjoy more, because the exchange rate will be in favor to them. On the negative side, if you are a traveler to the USA, then most likely the travel agencies will be experiencing the lower number of foreign travelers due to the fluctuation in the exchange rate. When companies such an Alliance Design Concepts doing business with suppliers or customers that operates in different countries, its very important to understand and share the foreign exchange risk with others i...

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...f you know that currency that you are dealing with fluctuates by about 3 percent per year to USD, then you could easily charge 3 percent more for the product or services you offer in that country, in the USA particular to my example. By charging 3 percent more, you will get a baseline price if the currency will decline by 3 percent, and if the currency declines less than 3 percent ,the company will get an extra income. No one knows the best practices on how to mitigate the exchange risk, but still every company has some strategies that they can implement to decrease the risk and increase the profit. Overall, the foreign currency exchange risk is just something that every business should be able to deal with in a global economy, as long as they are not afraid to accept strategies that sometimes will take a little longer to see the results or they can failed in fact.