How High Volume Sellers Minimize Currency Costs to Maximize Margin

No matter what stage your business is in, whether you have revenues that are 7 figures or more, or are just starting out getting your first product out the door, the goal is the same, turning a profit.

 

I am not saying you have to make a profit on day 1, or even years 1-5, but sooner or later your bottom line needs to be positive for your company to actually have value. For that to happen, you have to know two basic things, the price you can sell your product for, and all of the costs associated with selling that product.

 

Anyone can start a business and sell a product, but the really successful businesses are the ones that find ways to minimize every cost associated with selling that product. This means finding efficiencies wherever you can, and one of those efficiencies needs to be not just how you move product, but how you move money.

 

High volume sellers know that moving money between currencies has a cost, usually between 2-4%, and moreover, they know that these costs significantly impact their bottom line.

 

How High Volume Sellers Minimize Currency Costs to Maximize Margin currency conversion concept US dollars and euros on scale

 

Why 2% Matters:

The table below represents what 2% of revenues is over the span of one month, one year, and five years. Pick the row that is closest to your business.

Monthly Revenue 2% Savings on Monthly Revenue Annual Revenues 2% Savings on
Annual Revenues
2% Savings over
5 Years
10,000 200 120,000 2,400 12,000
50,000 1,000 600,000 12,000 60,000
100,000 2,000 1,200,000 24,000 120,000
500,000 10,000 6,000,000 120,000 600,000
1,000,000 20,000 12,000,000 240,000 1,200,000

 

As you can see, 2% adds up quickly. More importantly, the numbers in the right-hand column don’t represent additional revenue, they represent additional profit.

 

Another way to think of 2% savings is an increase in profit margin. If your profit margins are 20% after all costs, shipping, advertising, marketplace fees, salaries, etc., a 2% savings represents a 10% increase in profits.

 

Profit Margin 2% Savings’ effect on Profit Margin
5% +40%
10% +20%
15% +15%
20% +10%

 

Bottom line, you want to make as much profit as possible, and minimizing your currency costs is a fundamental area that every seller that has international revenues or expenses should pay attention to.

 

Successful high volume sellers know this and do a few things to ensure they are minimizing their currency costs.

 

Getting the best price:

Banks are very good at hiding the real costs of sending money internationally. While wire fees are annoying, for transfers above $2,000, they are usually not the biggest expense.

 

Banks also charge a foreign exchange (FX) margin on any transfer that involves more than one currency. So while that $45 outgoing wire fee isn’t fun, the $300 FX cost on your $10,000 transfer is where it really hurts.

 

High volume sellers know about this margin and negotiate hard to get the FX margin reduced. Getting below 2% is the goal, and the more money you move the more negotiating power you have to get that margin reduced even further.

 

How High Volume Sellers Minimize Currency Costs to Maximize Margin cost cutting concept scissors cutting 100 US dollars in half

 

Maximize same currency payments:

If you are in the US and selling products in Europe, you are going to be paying VAT. Since you are already making money in Euros (EUR), you don’t want to change those Euros for dollars (USD), only to turn around and send USD back to EUR to make your VAT payment.

 

High volume sellers will hold balances in currencies that they know they will need to pay out in the future. This saves them roughly 4% on all amounts that first come in, and then go back out in the same currency, rather than converting twice and incurring FX fees twice.

 

Don’t move the same dollar twice:

If you have income in one currency, let’s say Euros, expenses in another currency (RMB payments to a supplier in China), but operate in a third currency (USD), you want to make sure you are moving money efficiently. Taking EUR revenues, moving them back into USD, and then moving some of those EUR (now USD) revenues to pay for additional product from China in RMB means you are moving the same dollar twice, and not moving money efficiently.

 

Successful high volume sellers making money in multiple currencies are set up so to purchase additional product using those same currencies. Rather than first converting EUR to USD and incurring an FX fee, then using USD to pay their supplier in RMB (moving the same dollar twice), they will make the payment directly from the EUR revenues, thereby only paying an FX fee once.

 

"Successful high volume sellers making money in multiple currencies  are set up so to purchase additional product  using those same currencies."   Click to Tweet

 

Finding a Solution:

While this may sound straightforward, getting the right banking infrastructure in place is not. Opening a bank account in the UK as a US company can be very difficult, and often requires getting on a plane and making a visit.

 

Fortunately, there are companies like OFX that can help you significantly expand your currency management capability with just one application that you can fill out at your desk. Visit us here to find out more.

 

About the Author:

Gabriel Grisham has spent over a decade working with companies on cross-border commerce. A native of California, he lived in China for almost ten years before returning full time to the SF Bay Area. Gabriel has a B.A. from Duke University and an MBA from Thunderbird School of Global Management. You can reach him at Gabriel.Grisham@ofx.com  Learn More about OFX: http://bit.ly/2CoubeM 

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