International expansion is vital for the growth of many startup, and modern technology makes it easier than ever to do business overseas. Yet if you’re going take this step, it’s crucial you understand how the currency market can affect your new business and use forex charts on trading platforms to better manage your risks. But why is this the case?
In this article, we’ll explain why international startups need to monitor the forex market.
What is the forex market?
The forex or foreign exchange market is an over-the-counter marketplace that determines the exchange rate for global currencies. Exchange rates determine the value of a pair of currencies relative to one another, affecting trade and the flow of money between the corresponding pair of countries. Crucially, exchange rates are typically volatile, meaning they fluctuate rapidly and often by drastic amounts.
Why do currencies fluctuate?
Currency fluctuations occur because of changes in supply and demand for a given currency. These changes are often caused by economic factors in each country such as inflation rates, interest rates and economic performance. They can also occur because of domestic political and geopolitical changes, which often influence how much trust there is in a country’s currency. For example, Brexit has had an impact on the UK economy and the value of GBP.
How can exchange rate fluctuations affect startups?
Currency fluctuations mainly affect international startups when buying or selling overseas.
When a startup buys overseas and GBP depreciates relative to the foreign supplier’s currency, the startup can’t buy as many goods or services for a given amount of money.
On the other hand, when a startup sells overseas and its customers’ currency depreciates relative to GBP, the startup’s goods and services become more expensive and there’s less demand. If it submits invoices in a foreign currency and the customer’s currency appreciates relative to GBP between the invoice date and the payment date, then the startup will receive less money.
Why are startups especially vulnerable?
Startups can be more vulnerable to currency fluctuations compared to large international firms.
Large international firms often have operations within their customers’ countries. This means that they can source goods for their products and services and sell to their customers in the same currency, avoiding the often-costly consequences of exchange rate fluctuations.
In contrast, startups typically have smaller operations within a single country. If a startups suppliers and customers are based abroad, then there’s a smaller chance it will be able to do business in a foreign currency and avoid the impact of exchange rate fluctuations.
The bottom line…
Currency fluctuation can have a huge impact on the bottom line of your international startup. While understanding and navigating these fluctuations may seem complicated, it’s achievable if you leverage technology to proactively monitor the forex market. Doing so will allow you to mitigate risks and seize opportunities the market presents you, helping your startup survive and thrive.
