In today’s global economy, companies need to trade across borders to eliminate their growth ceiling. However, once they start operating in foreign markets, these businesses will have to transact in several currencies, other than their home currency. German manufacturing companies, for example, may export to the UK, Africa, and the United States. Payments may therefore come in the form of US dollars, British Pounds, Euros, and dozens of other currencies. These businesses may also outsource parts and human resources from around the globe and pay in different currencies. Managing these cross-border payments may require the creation of foreign currency journals and the continuous revaluation of prices according to current exchange rates. It may also compel companies to report business financials in multiple currencies. Without a proficient multi-currency management system in place – processing, accounting for, and reporting these transactions can be burdensome and frustrating.
But what is a multi currency system? Put simply, a multi-currency system is software that facilitates cross-border transactions in different currencies. These systems also simplify multi-currency accounting and reporting. Let’s explore further what multi-currencies mean for international businesses and why they are so important.
Multi-Currency Systems: A Brief History
Cross-border trading is by no means a modern phenomenon. Since humans established the concept of money, governments, and nations, there was a need to set a standard currency value benchmark. In the early days, gold became the common reference point for how valuable currencies were. Since gold eventually rarely exchanged hands in return for goods and services, businesses could use their home currency as a base marker for an exchange rate. The pound sterling, Spanish dollar, and eventually, the US dollar became the dominant currencies. Exchange rate fluctuations and logistical challenges in moving and exchanging currencies across borders, however, still created a lot of inefficiencies. In modern times, electronic transfers and currency exchanges allow businesses to transact across borders at the click of a button. Multi-currency systems are, however, still necessary to keep track of transactions with customers and suppliers from different countries.
How Multi-Currency Systems Work
Multi-currency systems use a base currency as a referral point to account for transactions in as many currencies as a business wants to use. The base currency is typically the company’s local currency. These systems can also facilitate the operation of several companies with different base currencies. Foreign suppliers and customers are set up in their own currencies. As such, invoices, payments, receipts, and credit notes for these foreign business partners are paid out and recorded in their home currency. Each transaction also features an exchange rate that’s prevailing at the time when the transaction was processed. Backdated transactions reflect the current exchange rate, but can be manually overridden to a previous one. If there’s any currency gain or loss, it’s automatically calculated and accounted for by the multi-currency system. Companies can, however, revalue their invoices, credit notes, or advance payments.
Why are Multi-Currency Systems Important?
As we mentioned before, multi-currency systems allow businesses to transverse local and regional barriers and transact in other currencies. As a business, you can also automatically revalue transactions and avoid losses when significant exchange rate fluctuations occur. Companies can also hold bank accounts in currencies other than their primary accounting one. Different monetary systems have different accuracy and rounding requirements that need special handling.
With traditional manual reporting, tedious currency conversions are required, which risk inaccuracies, especially when the transactions involve several countries. Even slight conversion errors can add up and lead to significant misinformation which can be costly to the organization. It’s possible to manually keep business accounting books tidy, but the time and effort required to do that can be used for other more productive tasks. When employees travel or make online purchases online with a multi-currency system, they don’t have to report airfare, hotel, and other expenses in multiple currencies. A streamlined process logs, converts, and reports transactions made in different currencies in one report, allowing the financial department or management to quickly review these expenses during an employee’s trip or when they return to work. With the advent of online shops, companies can serve an international market from virtual storefronts. Multi-currency APIs allow customers from any country to view product pricing and transact in their local or any other preferred currency.
Multi-Currency System Real-World Example
If your business trades across international borders, then you’ve probably had to deal with different currencies more than a few times. For occasional cross-border transactions, using wire transfers and traditional banks might be convenient. For businesses that service numerous foreign customers and suppliers, however, a multi-currency system is a must-have.
To fully answer the question of what a multi-currency system is, we can use an imaginary real-world example in the form of Bi-Tech, a German high-end road bicycle manufacturer. Like most companies in that industry, Bi-Tech builds its frames locally and sources other parts from China. The company, therefore, pays local suppliers in Euro and its Chinese suppliers in Yuan. As a company looking to extend its reach, both in Europe and globally to other regions, Bi-Tech has shops in the UK and Australia. So it has to pay transporters and employees in the Pound sterling and the Australian dollar as well. As Bi-Tech is only starting to appreciate the implications of transacting in multiple currencies, it still uses its local bank to exchange currencies and make international transfers. This setup creates the following challenges for this budding manufacturer:
High Bank Charges
The first thing that Bi-Tech will discover within a few months is that multinational banks don’t exactly provide the most affordable multi-currency banking services. While these banks have a massive global footprint, they typically operate in local silos, making international payments expensive. Transfer charges vary between different banks, but traditional banks rarely compete with specialized multi-currency service providers. Before they make a payment, Bi-Tech only knows how much their supplier will receive, but not how much money will be deducted from their account. That’s because most banks aren’t upfront with all fees and charges for each transaction. Variability and lack of transparency in currency conversion and transfer charges make it difficult for the company to manage its cash flow when large payments are due.
Recurring Payment Delays
Besides having a significant portion of their profit margin pecked at by high bank charges, Bi-Tech occasionally has to follow up on missing or delayed transactions. These delays not only tarnish the company’s image with suppliers but also threatens the smooth flow of business, as well as Bi-Tech’s bottom line. Traditional banks use SWIFT to process payments. The system, which was created in the 1970s, is usually reliable but remains unwieldy, slow, and expensive.
Enter Multi-Currency Systems
After working around several traditional bank pain points for a few months, Bi-Tech’s directors resolved to make a few changes. The first and most significant was to switch to a dedicated multi-currency system, such as Cashero. The numerous benefits the company is set to enjoy include the following:
Competitive Fees and Exchange Rates
Dedicated multi-currency system providers typically offer competitive foreign exchange rates when they process your international payment. As such, companies like Bi-Tech don’t have to lose money when they pay their foreign suppliers or when paying employees working in other countries. Alongside fair foreign exchange rates, multi-currency service providers are transparent with their fees and charges. Before Bi-Tech makes any transfer, the company will know exactly which fees it’s paying at the point of transfer, which helps with cash flow management.
Reliability
Because multi-currency service providers aren’t one-size-fits-all establishments, they tailor their packages to suit their customers’ needs and reduce the overall banking costs. For example, Bi-Tech now only pays for the services it needs and gets seamless customer support whenever there’s a slight issue. Instead of using SWIFT, their new multi-currency service provider uses their suppliers’ and employees’ local banks systems to keep costs and delays at a minimum. Above all else, Bi-Tech didn’t have to go through lengthy KYC procedures to open a business account and have access to several currencies, including EUR, USD, and GBP, in which they can hold balances and transact. As such, Bi-Tech can now seamlessly manage its payments, accounting, and reporting processes.
The Bottom Line
In a globalized business environment, companies need to process, document, and report their earnings and expenses in both their local and foreign currencies. Businesses that operate online storefronts need reliable software that displays local-currency prices for customers in all parts of the world. Conversely, they also need to understand how much they owe suppliers in their accounting currency. When multiple currencies and fluctuating exchange rates are involved, such a process can quickly turn messy and cumbersome. Making payments via the traditional banking system is not only expensive, but it can occasionally prove to be unreliable. All of these challenges and more can easily be solved by the use of multi-currency systems, such as Cashero, which are becoming evermore commonplace for businesses of all sizes.
Content Disclaimer:
As of the date of publication, the information contained on this page is deemed to be factually accurate for all terms of conditions, features, and fees. Changes made to Cashero’s terms of conditions, features, or fees after the publication of this content may not be accounted for.
App Disclaimer:
The Cashero App is now available for download in both the Apple App Store and Google Play Store, though not all features are currently functional. Cashero has not yet officially launched.
