The world is getting smaller with people and companies trading across borders millions of times a day. This means that almost every business has the potential to buy goods and services in different currencies and can, by the same token, sell almost anywhere in the world.
So how do you deal with exchange rates in your bookkeeping, and does it matter? In this post, we wanted to give you a quick insight into foreign exchange fluctuations and how to deal with them.
Anyone can buy and sell in different currencies
It’s not that long ago that foreign currency bookkeeping was almost exclusively the domain of importers, exporters, and airlines. The internet and global banking mean the world has come a very long way since then though, and these days it’s possible to buy almost anything, from pretty much anywhere in the world.
Not only can businesses buy and sell goods much more easily, but they can also contract for a huge variety of services, and never actually meet with clients face to face. We’re living in an age of digital nomads who travel the world, working on laptops at beaches, by the side of lakes, and at world heritage sites – just as if they were in an office in Luton.
This flexibility means that now more than ever, businesses need to understand foreign currency and how to deal with it in their bookkeeping.
The practicalities of charging customers across borders
So how does all this international jet-setting trade happen? Well, that does partly depend on how you interact with your suppliers or customers.
For example, a freelance writer might use a platform like Upwork so clients can hire them on a project basis. Clients are billed and pay in US dollars, regardless of what currency they normally operate in.
This is just one example out of (probably) hundreds, such as:
- Invoicing a client in another country
- Running an ecommerce website that clients use to buy goods from you directly
- Selling through an online marketplace like Amazon, eBay, or Etsy
The internet makes selling worldwide much faster, but any marketing person will tell you that showing prices (and selling) in your customer’s local currency tends to be more appealing to them. But what on earth does that mean for taking payments?
Taking payments in other currencies
The good news is that most of the big online marketplaces will take care of this for you. Even if you manage your own site using a platform like WooCommerce or Shopify, there are plugins that will automatically handle sales in multi-currencies.
Then there are payment processors like PayPal or Stripe to handle the actual transmission of money across borders.
What happens when the exchange rate changes?
If you invoice a client in another currency, and then the exchange rate is different by the time they pay you, it can mean that:
- You receive a different amount to what you were expecting
- The invoice amount is different to the payment amount you receive, which can make it look like your books don’t balance, or that the client hasn’t paid you the right amount.
To avoid any nasty surprises, record the currency conversion rate that was correct at the time of the invoice date – just remember that the invoice date might not always be the date that you create the invoice! Then record the currency conversion rate again at the time of the transaction.
Recording the breakdown of all these different amounts makes it easier to see exactly what happened – Pandle will automatically do this for you if you’re using our Multiple Currencies tool!
That way you won’t end up asking a customer why they underpaid, when it was the exchange rate that caused the difference. And you certainly don’t want a poor currency exchange rate making it look like business is going well in another country if it isn’t.
Should I have separate bank accounts for other currencies?
Banks will often charge an absolute fortune to receive overseas currency into a GBP account, so if you do a lot of business with another country then it might make sense to have a specific account that deals with that currency, or you might even have an account in another country.
Of course, that then means that you need to do more bookkeeping to manage your new bank account. You might also be charged a fee for the account, but this depends on the bank so as ever – check those terms and conditions.
There is a simpler answer, and it’s to let tech take the strain. Learn more about multi-currency bookkeeping with Pandle, and create your free account.