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Top 5 Strategies to Control Costs in Cross-border Finance Operations

Managing finances for a business involved in international trade introduces complexities and hidden costs that can affect profitability. To safeguard your financial outcomes, it’s crucial to identify and mitigate these expenses. Here are five key strategies to help finance teams optimize costs in cross-border operations.

 

1. Scrutinize Foreign Exchange (FX) Rates

Challenge: International business dealings often involve currency conversion, a process fraught with hidden fees. Many financial service providers profit from the opaque nature of FX markets and clients' lack of awareness about these FX charges.

Example: A company with £10 million in foreign currency turnover faced hidden fees of £100,000 annually due to an average 1% conversion fee from their bank.

Solution:

  • Avoid using card payments and platforms like PayPal for large transactions due to high conversion fees (2-4%).
  • Demand transparency from your banks and FX providers regarding FX markups.
  • Use online platforms that offer real-time price transparency.
  • Regularly compare and negotiate FX rates with different providers.
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2. Adopt Local Payment Methods

Challenge: International B2B payments often rely on SWIFT transfers, which can be costly. For example, a business transferring £10,000 via SWIFT with their bank can incur payment fees that add 0.25% to 1% of the transfer amount, which can quickly add up for a medium sized business.

Example: A logistics company saved 90% on payment fees by switching from SWIFT to local payment methods like ACH and SEPA.

Solution: Utilize "local" payment schemes such as SEPA in Europe and ACH in the US to reduce costs and streamline transactions without compromising speed or accuracy.

 

3. Streamline Accounts Payable (AP) and Receivable (AR) Processes

Challenge: Managing multiple currencies can result in resource-intensive, error-prone processes.

Example: A travel business faced inefficiencies due to manual reconciliation across various banks, leading to costly errors and delays.

Solution: Implement robust technology systems that integrate with your ERP to automate and simplify AP and AR processes, reducing manual effort by up to 80%.

 

4. Optimize Cash Management

Challenge: Idle cash balances in foreign currencies can lead to FX risks and missed opportunities for earning interest.

Example: An e-commerce firm missed out on potential interest income by leaving cash in multiple currency accounts to avoid high payout fees.

Solution: Open a "hub account" to consolidate and manage cash flow flexibly across multiple currencies, optimizing interest earnings and reducing borrowing needs.

 

5. Proactively Manage Cash Flows and Currency Risks

Challenge: Surprise currency fluctuations can erode profits through FX conversion costs and payment fees.

Example: A UK wholesaler faced increased import costs due to abrupt currency depreciation during the government crisis in September - October 2022.

Solution: Use FX hedging techniques to stabilize cash flow and manage risks effectively. Leverage technology platforms that integrate with your financial systems to automate and simplify risk management.

By implementing these strategies, businesses can effectively manage international trade costs, leading to smarter financial management and enhanced profitability. Adopting these measures will not only save money but also streamline operations and mitigate financial risks associated with cross-border trade.

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