For American companies, the siren call of overseas profits is strong, and it has led to corporate decision-makers expanding their business operations.
Case in point—the number of U.S. companies doing business overseas is rising significantly. According to a 2016 study from Wells Fargo, 87% of U.S. companies “agree that international expansion is needed for long-term growth." Additionally, “578.82 billion U.S. dollars, worth of goods and services, were exported from the U.S. in the second quarter of 2017," continuing a long-term U.S. export trend that began in 2010, according to Statista.com.
While exports rise and more U.S. businesses are setting up shop in foreign bourses, U.S. companies doing business today won't get much ground until they define financially-related foreign exchange best practices.
Why? Because the risks associated with foreign exchange issues when doing business overseas are abundant, including volatile currency fluctuations, dealing with local governments and markets, and handling incoming and outgoing payments and receipts in foreign countries.
While corporate financial departments share the burden of getting it right on foreign exchange matters, the tax and accounting areas, in particular, bear a critical burden on ensuring FX matters are handled in an effective, timely, and cost-effective manner.
Have a uniform–and user-friendly–foreign exchange accounting policy.
American companies who are successful in managing the financial side of the foreign currency equation have one standard in common: a uniform, intercompany overseas foreign exchange policy. A policy that's as easily understood by the chief financial officer as it is by regular accounting department staffers is essential in moving forward on the foreign exchange front. Key issues to incorporate into such a policy include currency fluctuations, hedging currency exposure practices, and risk exposure in key areas like transactions, balance sheet translations, corporate earnings, operating, and economic exposures.
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Get senior management on board and on the same page.
Confidence is key when rolling out a new foreign exchange strategy, and everyone in a company's financial operations domain needs to be on board for maximum FX effectiveness. Job one, in that regard, is to engage and enlist senior tax and accounting managers to steer the company in the right direction on foreign exchange issues, strategies, and mandates. Their other top priority should be to establish a platform of integrated policy creation and management to provide stronger and more sustainable FX operational outcomes.
One idea to get that program into high gear quickly and effectively is to roll out a “center of excellence" for larger companies, or a designated "FX Expert" for smaller firms. The expert category should possess a heavy tax and accounting emphasis to better enforce the company's foreign exchange uniform policy, and to provide leadership support to the tax and accounting managers and staffers tasked with day-to-day foreign currency operations.
Adopt solid FX data automation practices.
Automation offers a cleaner,
more effective, and seamless
path to good foreign currency
Corporate tax accountants often fall into the habit of downloading spreadsheets and manually importing data into their accounting systems. Automation offers a cleaner, more effective, and seamless path to good foreign currency best practices. By automating your FX data feed and plugging it directly in to your enterprise resource planning or financial reporting software via an application programming interface (API), accounting teams will have more time to concentrate on other pressing tasks while eliminating the threat of human error from the company balance sheet. After all, you've already automated other mission-critical business processes. You should be automating your FX data, too.
Get Your FX data from a single source.
Getting all your foreign currency data from one single place would not only streamline the accuracy of information flows among far-flung global offices, it would aid in the prevention of tax audits, as the data derives from the same, trusted information source.
Focus on the details.
To bolster foreign exchange accounting and tax best practices, it's not enough to ensure company financial accounts are operated on one unified set of rules. U.S. companies also need to address everyday FX operation practices and ensure they run seamlessly. For example, companies will need to make sure all accounts operating under a single transaction currency are cleared in the same transaction currency. Failure to do so can lead to currency exchange losses that can grow over time. Company’s accountants should be in the habit of posting transactions immediately, applying the current calendar date equally—as the effective date and as the transaction posting date. Controls should be in place before foreign currency transactions happen, and each step of those controls should be thoroughly-documented and spread across different corporate finance departments, who should align with company FX objectives to foster a cross-department, cross-functional foreign currency operations process.
Above all, intra-country companies should make it a practice of training accounting personal on foreign exchange best practices and put people in place who have the expertise and credentials to properly manage the company's overseas accounting efforts.
Do all that, and you'll improve your odds to survive and thrive when conducting business on foreign shores.