How to Manage Billing in a Foreign Currency
BY: BRIAN HUGHES ON WEDNESDAY, APRIL 06, 2016
Billing in foreign currencies can be tricky, especially when it comes to reconciling currency fluctuation differences between the time of invoicing and payment. In an ideal world, you’d receive payment for a product or service at the same time you invoice. This easy, on-the-spot transaction means you can convert payment immediately from the foreign currency using the current exchange rate into your native currency. In real life, of course, many small business invoices have 30, 60 or even 90-day billing cycles. This means that the currency conversion rate at the time of billing can differ from the conversion rate at the time or receipt. Hello accounting headaches! Complicating this problem: foreign currency wire transfer services that can eat into company profits.
Not a numbers whiz? That’s okay– you don’t need an accounting degree to master the basics of foreign currency billing and money transfer. Here’s how to get started:
Foreign Currency Fluctuations in Billing: Solve This Accounting Nightmare
What happens when you bill your UK-based client $10,000 on November 1st and they pay you in pounds on December 1st? Currency fluctuations occur every day, which means the final amount that your client pays on December 1st will be slightly off from the amount you originally entered in your accounting chart on November 1st. You’ll need to account for the gain or loss from this fluctuation.
First, start by invoicing the client in their home currency (pounds). Let’s say that when you issued the invoice on November 1st, that $1,000 invoice was the equivalent of 684 GBP, so that’s what you bill them. Mark that conversion on your accounting chart. When you client pays you 684 GBP on December 1st, you’ll need to convert those pounds back to dollars. Due to conversion rate fluctuations, let’s say you’ve actually received the equivalent of $1,017.93. You’ll need to mark the $17.93 as additional profit. Conversely, if you had received less than the $1,000 you billed, you would mark the difference as a loss. (Accounting junkie? You can read more about how to handle foreign currency transactions, along with special rules and definitions, in this IRS publication)
PayPal v. Wire Transfers: Which Makes Financial Sense for Your Business?
While PayPal is often the default merchant option for receiving foreign currency payment, fees can chip into your profit. At the time of publication, PayPal’s international fees for accepting credit cards were 3.9% plus a fixed fee per transaction, depending on the payee’s currency. For small-time transactions, PayPal’s fee structure, ease of use, and near-universal acceptance may make the most financial sense for your small business. For larger transactions, however, PayPal’s fees can really chip into your final profit and a flat wire transfer fee may make more financial sense.
As a good rule of thumb, if the transaction is less than $1,000, PayPal may be the simplest solution. However, if your business will be frequently transferring or receiving large lump sums, compare international wire transfer service offerings. World First, for example, is a service that takes a smaller margin than banks and may be able to offer a better exchange rate when transferring money, all without any fees. UK-based company Currencies Direct also offers competitive exchange rates and fee-free transfers. Use an international wire transfer comparison website to find the right secure wire transfer service for your company’s needs.
In today’s global economy, it’s not unusual for a small business based in Boston to have customers in Brussels and Bangalore. Don’t assume that PayPal is always the best way to transfer money and receive payment, however. Taking the time to understand gains/losses associated with foreign currency transactions, and comparing wire transfer services, can save your business from a billing nightmare.
Do you use a foreign wire transfer service? Share your favorites below in the comments section.
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