Globalization means that more businesses than ever have financial dealings and clients abroad. Modern technology, and in particular the internet, has facilitated global communication as well as giving every business a potential shopfront to the world. Working internationally can have many advantages, including the opening up of lucrative new markets and lower operating costs for manufacturing and services. However, there are also pitfalls and problems to look out for, especially in the financial arena.
Foreign exchange riskÂ
Changes in the exchange rate between one country and another can cause the value of an investment abroad to fluctuate considerably. Business dealings between the US and the UK have recently been hit by the shifting value of both the dollar and the pound, caused mainly by political uncertainty. The best solution for businesses using both currencies is to utilize a reliable US to UK money transfer to get the best possible exchange rates. Unfortunately, in a worst-case scenario, an investment can devalue considerably due to swings in the value of currencies.
The reasons are straightforward. If the foreign currency depreciates against a business’s domestic currency, then the profits made abroad in the foreign currency will be worth less when changed into the domestic currency. Of course, that can work both ways, and if the foreign currency appreciates in value then unexpected profits could occur. But in all such cases the result is uncertainty.
Political riskÂ
A change of government or even just a change in policy, in a foreign country that your business is dealing with, can also have financial repercussions. The changes could be anything from an increase in taxes on foreign investors, trade barriers, or even the nationalization of companies and industries you’ve been dealing with. Violent revolution or civil war are less common risks, but they do, of course, occur. Changing tariffs and quotas in the country being dealt with can also have a negative effect on profits.
Dealing with clients in countries that have a free trade agreement with your own can reduce the level of political risk, but can never eliminate it completely. Political decisions at home can also have a harmful impact, especially if they involve relations with the country where your client is based.
Protecting against risksÂ
Having abroad portfolio of investments is the best way to minimize financial risk, as is taking out appropriate insurance policies. An awareness of cultural differences is also important. Business representatives must be careful not to offend a foreign client with a seemingly innocent phrase, gesture or action that could be interpreted differently in another culture.
When working with clients in foreign countries there will always be an element of financial risk; however, it can be reduced by using the appropriate channels, staying abreast of political and economic factors, and always operating in an atmosphere of mutual respect. Always be on the lookout for fraud or corruption, but at the same time understand that doing things differently is not always a bad sign, and that sometimes the best results come to businesses that can adapt to new ways of working.
