Foreign exchange risk
Foreign exchange risk is the chance that the US‑dollar value of your foreign‑currency invoices, bills, or balances changes as exchange rates move. It affects the cash you actually receive or pay and can create FX gains or losses in your books—on individual transactions and when you revalue unpaid items or foreign‑currency accounts.
Where small businesses typically face it:
- Invoices or bills issued in another currency between the invoice date and payment.
- Quotes and contracts priced in a foreign currency over a longer period.
- Foreign‑currency bank accounts or payment processors that hold balances.
- Prepayments, deposits, or refunds in another currency.
- Imported inventory or subscriptions from overseas vendors.
Simple example
You bill a client 1,000 EUR. If the euro weakens before payment, you receive fewer USD; if it strengthens, you receive more. The difference is recorded as an FX gain or loss.
To manage it, decide upfront who carries the currency risk, choose the billing currency, and settle quickly. In bookkeeping, record realized differences when items are paid and revalue open items and foreign balances using a reasonable market rate.
Simple ways to reduce it:
- Invoice and get paid in USD when possible.
- If you price in another currency, add a buffer or include an exchange‑rate clause.
- Shorten the time between quote/invoice and payment.
- Use a forward contract or a guaranteed conversion rate from your bank or payment provider.
- Match currency cash flows: collect and pay in the same currency where you can.
- Keep only necessary amounts in foreign‑currency accounts.
