You may be thinking of expanding your store for buyers in other countries. Or perhaps you cracked a deal with a new foreign supplier. Taking your business to the international level is a hard task as well as a big step that determines your growth.
However, dealing with small business accounting when foreign currencies are involved is no fun. Let us check out the basics of foreign currency accounting and all that you need to know.
Why Think Of Foreign Currencies?
So why not just avoid this situation in the first place?
First, most people like paying in their own currency. Now, accepting different currencies may help you attract new customers from different countries.
Second, you may have suppliers accepting their local currency or charge fees for conversion. However, for a better and long-term business relationship, it makes sense that you pay those suppliers with the currency they want.
Getting Practical – How To Pay And Get Paid?
While dealing with vendors or customers in other nations, you must decide the right way to get money from A to B and state the terms properly in online policies and contracts.
It is a good moment to consider what you can do in your small business accounting to keep your transfer fees to a minimum and manage the risks of exchange rate fluctuations.
Choose Proper Payment Methods
How will you get the money from your customers? Or how will your suppliers in foreign countries get their money from you?
- Ecommerce Payment Providers- Find out whether or not your current situation allows you to put down prices and accept payments through various currencies. Depending on that, decide if you are fine with the fees.
- PayPal- This one lets you accept and make payments in over 20 currencies and even hold foreign currency in balances. They don’t charge you for currency exchange.
- International wire transfers- Banks at times charge you a fee of $50 for an international money transfer. You can try new web-based services such as OFX or TransferWise for a quick and better solution.
Setting Payment Schedule
It is better to know when you can have the money entering your account. But invoices must be in foreign currencies.
Why? Remember exchange rates fluctuate, and the value of your invoice may change drastically in some weeks. Get assistance from a firm offering small business accounting services.
Getting paid fast really helps, so you know the invoice is worth it, or you may end up paying more. Once in a while, it may work in your favor, but for proper planning, the shorter the payment time, the better it is.
How To Know What Exchange Rate To Use?
Exchange rates change frequently. You must know which rate you must use when converting amounts to your country’s currency.
The rules are as follows:
- For expenses and revenues – use the rate that was in use during the transaction date. If you find the currency to be stable, it is fine to use a monthly or weekly average. But if the exchange rates are fluctuating, you need to track the rate of every transaction date.
- For liabilities and monetary assets – you must use exchange rates in effect on that date when you have created the balance sheet.
Monetary assets, as well as liabilities, are things with fixed and clear value. Consider an international bank account, accounts receivable, and payable.
When Is It Time For Financial Reporting?
When you think of preparing the financial statement at the end of a month, use proper exchange rates on the balance sheets for converting assets and liabilities included under foreign currency.
It includes the accounts receivable and payable. If the exchange rate changes between the balance sheet date and the transaction date, you list the changes as income in case it is a gain or an expense for loss.
Foreign currencies may be hard to handle, make sure you hire a pro to get the best results and avoid mistakes.
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