Effective cash management strategies are key to the success of any business. The following is an excerpt from Cash Management Toolkit for Small & Medium Businesses , written by Jeffrey D. Sherman and published by the Canadian Institute of Chartered Accountants .
Many Canadian businesses are financially bilingual (or multilingual) – it is routine to bill for, or pay for, goods and services in other currencies: often United States dollars, but also euros, British pounds sterling, Japanese yen, Hong Kong dollars, and so on. A small amount of effort can save a lot when you deal in foreign currencies.
If you have not made prior arrangements with your bank for buying or selling a foreign currency, you will incur more costs for these transactions. While they won’t charge an overt commission, the rate you pay will be up to 3 per cent higher than the wholesale “midmarket” rate. (This foreign exchange rate is called the bulletin rate, or branch rate, and normally only changes once a day.) The spread works both when you buy and when you sell, so if you convert $1,000 to euros, then convert it back, you will have about $60, or 6 per cent less than what you started with, even though there is no commission. The bank will reduce this spread – if you ask. The amount of the reduction will depend upon the expected volume of business and the competitive situation.
Depending upon the volumes, frequency of transactions, and currencies, you may be able to deal with the banks’ foreign currency dealers or through an automated online foreign exchange system. The exchange rate will be less than the bulletin rate, sometimes a lot less, and is based upon the wholesale rates right then. By talking to the dealer, you can also get a sense as to what they expect to happen in the markets as well as enter into more sophisticated trades, for example, those that are contingent upon attaining specific rates.
Canada is unique in having separate clearing systems for Canadian and for United States dollar items. If you buy or sell anything that is priced in United States dollars, it is cost-effective to have an account denominated in United States dollars to reduce the cost and the volume of currency conversions. There are actually several different types of U.S.-dollar denominated accounts. The least expensive type may work well for U.S.-dollar payments in Canada but suppliers in the U.S. may have to pay substantial fees and wait several weeks for cheques to clear.
Another type is paid through (normally) a New York bank or trust company affiliate or branch of your bank and clears through the United States clearing system. Yet another option is an account through a U.S. bank (that may be an affiliate of your primary Canadian bank) that then looks exactly like a domestic U.S. cheque.
For international activity, your bank will have specialists that can help to set up various specialized services:
Correspondent banking services: To help with international transactions, receipts and payments.
Electronic payments (similar to EFT): These include wire payments internationally, access to the United States payment systems such as ACH (automated clearing house).
Import documentary credit, letter of credit: To finance any payments for imports and inventory in transit.
Export documentary credit, letter of credit: To reduce your receivable risk for export sales.
Standby letter of credit, payment guarantee, documentary collections: To reduce risk for you or your counterparties.
Other trade finance services: May include advice and putting you in touch with service providers in other countries.
There are often several ways of achieving a particular objective. For international business activities, it is particularly important to ensure you speak to the right experts at your bank when assessing your company’s needs.
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Special to The Globe and Mail
Excerpted from Cash Management Toolkit for Small & Medium Businesses, by Jeffrey D. Sherman, published by The Canadian Institute of Chartered Accountants and sponsored by Canadian Imperial Bank of Commerce. Copyright 2010 The Canadian Institute of Chartered Accountants.
For more information on the book, please click here.
For the French version, click here.
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