Canadian companies pay close attention to the ever-changing exchange rate to the US Dollar. Most companies selling products or services in the US (or worldwide) bill in $US and are subject to this constantly moving demon. I remember a time when my company increased revenues in $US by about 15% in a quarter, while the exchange rate decreased by about 16% (leaving us with lower $CDN sales than the previous quarter)! Until you have actually experienced the negative results of exchange rates it is hard to appreciate their full impact.
So, how can you minimize the potential negative impact of fluctuating exchange rates?
Start by getting alignment between the CEO, CFO and VP of Sales. This can be a complicated affair when setting the rate for the annual budget. Once agreed, it locks in the budget for the next 12 months and by default the $CDN sales targets.
Budgets are almost never revised to accommodate changing exchange rates. Sales organisations are usually challenged to “make up the difference” in revenues due to a negatively moving exchange rate. My advice (although it is tough medicine), is to hold your Sales organisation accountable to deliver in the currency reported by the organization.
To mitigate the negative impact of exchange rate variation, companies can:
- Re-align expenses to be more $US weighted
- Place financial hedges (at a specific cost) to offset changing exchange rates
- Build exchange rate clauses into customer contracts
- Learn to accurately forecast geographic revenues over the longer term.
As a more extreme measure, a public corporation can be listed as a $US revenue company thus taking a large portion of the challenge away (this makes sense if most or all of the revenues are actually in $US). All of these approaches have varying degrees of success.
There is of course a potential silver lining. Exchange rates can move in the opposite direction to yielding more $CDN revenues. This windfall should be considered “extra”, with CEO and VP of Sales still driving for a higher “base number”.
Oh the joys of the exchange rate rollercoaster!
If anyone has any other tips on ways to minimize the impact of moving exchange rates I’d love to hear about them.
This article was published more than 1 year ago. Some information may no longer be current.