Living with a strong dollar

from www.BDC.CA

The rise of the Canadian dollar has had a serious impact on businesses exporting to the U.S. and international markets. Faced with reduced returns from U.S. sales, entrepreneurs may wonder how to protect themselves from the effects of further currency fluctuations.

In a nutshell, the way to reduce the risks involved with exporting is to be prepared for change. Success in exporting begins with developing a sound export plan, setting your prices wisely, improving overall productivity and taking advantage of various tools to manage exchange risk.

Have a solid export plan
No matter what the value of the dollar is, you should have a thorough exporting strategy in place to export profitably. Developing or updating your export plan can help you better understand your markets and your competition, and determine exactly what your goals are and how you will reach them.

Here are some questions that may help you deal with currency fluctuations:
1. Is there another market for your products? Exploring new markets where your product is more competitive can be a sound strategy to compensate for a volatile Canadian dollar.

2. Can you consolidate local markets? Are your products available nationally? You may want to consider all provinces in Canada.

3. Can you change or update your line of products to be more competitive in the export market? You may be able to add a product or to customize the sales and marketing of an existing product to appeal to a new market or demographic. Diversifying your products may help you gain more stability.


Price wisely

Your export plan can also help you price your products wisely. To protect yourself from current fluctuations, adopt a strategy that takes exchange rates into account. While your export prices must take into account the demands of the market, they should also be forward-looking. In general, export prices should be based on your cost of goods as well as costs related to tariffs, custom fees, value-added taxes, shipping and insurance. For these costs, you will also need to factor in variations in the value of the dollar.

Keep in mind that if you're pricing higher, this may be a disadvantage if you want to be competitive. However, a sound strategy to reduce operating costs can help keep your prices down. That's why maximizing your productivity is so important.

Improve your overall productivity

Working more efficiently translates into cutting costs or increasing your revenues, which can give you the competitive edge you need to gain a greater market share. This can include:

• Reviewing your production processes to see if each step helps create value for your clients and meets your goals

• Eliminating waste, including delays at customs, unnecessary transportation in your distribution process, defects and errors, etc.

• Outsourcing non-core aspects of your business to countries or firms that can do the work more efficiently and more cheaply. This can include having components manufactured abroad, or having an external firm handle logistics, customs, distribution, etc.

After you have analysed your opportunities, decide on a course of action. To keep your costs down, you can implement one project at a time. For example, if you're expanding to new markets and you need new equipment to remain competitive, you can begin by renting, and make plans to purchase upgraded equipment later.

Use exchange-risk management strategies

Foreign-exchange risk management tools (or hedging tools) can also help protect you from dollar fluctuations that can affect your earnings and value. Keep in mind, exchange contracts such as futures and options are complex products and you should talk to your banker and accountant about the most commonly used strategies for managing foreign-exchange risk. While there will always be some related costs to using hedging tools, these strategies can help you protect your profit margin. The following may help reduce your risks:

• Currency forward contracts allow you to lock a price at which your company is obligated to buy or sell a currency at your specified date. Forwards are non-transferable and not as flexible. You'll also need a line of credit for currency transactions. This will allow you to protect your revenues, profit margins or expenses at a fixed price.

• Currency futures contracts allow you to specify a price at which a given currency will be bought or sold at a future date. Your company can close out these contracts early if it's to your advantage; giving you more flexibility. You will also need to maintain a margin/cash deposit at all times to compensate for the credit risk.

• Currency options give you the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specific period of time. Regardless of whether or not you exercise the option, there is a cost.

If you are exporting to the U.S., you can also open a U.S. dollar account with your chartered bank, or establish a banking relationship with a U.S.-based bank. This may also make it easier for U.S. based firms to do business with you. There may, however, be tax implications, so it is best to review your options with your accountant or banker.

Get help from external consultants

Consultants who have an objective point of view are in a better position to help you assess the weaknesses and strengths of your export initiative.
Contact me if you are interested in additional informations.