The Hidden Cost Between Placing An Order And Paying The Invoice

At the end of August, a furniture importer agreed to buy $50,000 of sofas from its regular Chinese supplier, with payment due 30 days later.

The dollar price was fixed immediately. The cost in pounds was not.

That is when the business became exposed to currency movements. It knew it would need $50,000 in a month’s time, but if it waited until the invoice was due to buy those dollars, it could not know how many pounds it would need. Any fall in GBP/USD during those 30 days would make the sofas more expensive, even though the supplier’s price had not changed.

The importer contacted Paytrex and arranged a 30-day forward contract, securing a rate of 1.3620 for the future payment. When the invoice fell due late last week, its $50,000 cost approximately £36,711.

At the market rate of 1.3220 available when payment was due, buying $50,000 would have cost approximately £37,821 – £1,110 more. For a business selling on tight margins, that difference can take a substantial bite out of the profit on an order.

The exchange rate could, of course, have moved in the importer’s favour. The purpose of the forward was to give the business a known sterling cost when it committed to the purchase, so it could price and plan with confidence. The customer also obtained a better FX margin than it had received from its bank, providing a separate pricing benefit.

If you agree prices in one currency and pay later in another, it is worth reviewing the risk between those two dates. Contact Paytrex for a quick, no-obligation review.

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