4.5 QUOTING IN FOREIGN CURRENCIES AND CODING PRACTICE

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1 4.5 QUOTING IN FOREIGN CURRENCIES AND CODING PRACTICE 1. WHAT YOU WILL LEARN FROM THIS COURSE This e-learning series relates to the Critical Success Factor Sales Tools & Resources. It also relates to the CSF Sales & Fundraising, and a third which is having a Marketable Product/Service. The course is broken up as followsthe course is broken up as follows: Costing Fundamentals & Costing Services Determining Raw Material & Direct Labour Costs and Calculating Ratings Putting it all Together Doing a Costing Pricing Methodologies & Pricing Levels Quoting in Foreign Currencies & Coding Practice Sales Terms & Conditions & Discounts & Refunds Basic Structure of a Pricelist It is suited to all emerging & established organisations who want to cost & price their products properly, grow their sales and service their client base effectively. 2. Overview QUOTING IN FOREIGN CURRENCIES AND CODING PRACTICE In the previous instalments, we looked at some methods to help determine pricing, and how to differentiate between different customer types and their needs ito pricing. This next instalment is targeted at those of you who plan on exporting, as well as those who may deal with international suppliers. Also covered are some guidelines on using codes to identify your products and services, and accepted practice as far as this is concerned INTRODUCTION QUOTING IN FOREIGN CURRENCIES When doing an international trade show, or sometimes when negotiating with a foreign buyer who is interested in your products/services, you may be expected to prepare a pricelist or quote in dollars, Euros or pounds. This is an area that can cause a lot of uncertainty and stress, given the volatility of the Rand and the potential to make some very expensive mistakes. Remember, you are not in the business of currency speculation or gambling. If a certain customer insists on you quoting in Dollars or Euros, make sure you build in more than enough FAT to cover any fluctuations! The same applies if you are developing pricelists for an international trade show. Always 1

2 cover yourself, and always state the conversion rate used to arrive at an international currency figure. If you look at the graph below you can see how the Rand: Dollar rate fluctuated in Note the September drop from 7.1 to 8.05 (11%) in only 2 weeks! Recent times have seen even more wild fluctuations, so you can see why we suggest that, wherever possible, you quote in RANDS. We will look at some ways to protect you from this below PROTECTING YOURSELF FROM FLUCTUATIONS The most effective means of avoiding the dangers of forex fluctuation is to simply insist on always quoting in Rands, however this is not always possible and sometimes you will have to quote in a foreign currency. An effective way of managing risk is to build in an accepted level of fat so that should exchange rates go up or down, you remain relatively well protected. As an example: Current Spot Exchange Rate R/US$ = R12 Therefore, if you charge R100 in Rands for a product wholesale, you would ask $8.33 in dollars (R100 12) in order to get your R100 for the item. However, this conversion leaves you no room at all for fluctuation if the Rand suddenly strengthened to R11.50 to the dollar, look at what would happen: $8.33 x R11.50 = R95.83 meaning you get R4.16 less per product than you wanted. Now imagine that this happened on an order of items: 2

3 R4.16 x = a loss of R ! If you had used a more favourable rate for yourself up front, and thus asked for slightly more dollars wholesale per piece, you could have avoided this situation: E.g. R100 R11.00 = $9.09 REMEMBER THIS: Always state the rate of exchange you are using on your quotes/pricelists. Some people have a separate column for this purpose. Be careful of pricing yourself out of the market by building in TOO MUCH fat! 7-10% is about right. If in doubt, get help from an expert or someone who is experienced with the export market. Age your quotes and reserve the right to change your pricing if the currency rate changes Invoice Factoring (with thanks to invoicefactoring.co.za) Invoice factoring is essentially an advance on money / cash due to a business, by means of the "sale of the invoices" to a bridging company, usually a bank. This is not a loan against invoices but an outright sale of selected invoices (one or many) to a bridging finance company or a bank. It is common in export, when the terms of the deal often require the supplier/manufacturer to wait long periods before they receive their money. Why do businesses use invoice factoring? Many large retailers pay their suppliers on 60, 90 or even 120 days, and most smaller businesses do not have sufficient cash reserves to manage such delays in the receipt of payment. Factoring is a very simple and reasonably quick method (within 2 weeks of receipt of all documents) used by businesses to improve cash flow or working capital as and when needed. A typical Factoring scenario: ABC factory received an order of ceramic vases, which they made and delivered to their customer, a retail shop based in Holland. ABC has granted the retail shop 90 days credit, but ABC factory needs its money now, so it approaches its bank to arrange Invoice Factoring. Once the terms of the contract are agreed, the bank/bridging company advances up to 80 % of this money to ABC factory and then collects the money from the retail shop in 90 days time. The fee for the period the money was lent out can vary between 5 and 12% of the value of the invoice. This fee is deducted from the 20 % still due to ABC factory and the difference is paid to ABC factory Forward Cover Forward exchange contracts are used to secure a rate today for settlement at some time in future, usually longer than two business days. 3

4 Types of cover There are two distinct legs (transactions) in any rand/foreign currency deal. The importer/exporter can cover either one of the two legs of the transaction, or both of them, depending on the client s view of the currency market. The client can opt for: Foreign currency/dollar cover (thereby leaving the rand/dollar leg uncovered) Rand/dollar cover (thereby leaving the foreign currency/dollar leg uncovered) or Rand/foreign currency cover (thereby eliminating the entire currency risk). A customer wanting to enter into a forward exchange contract must state what type of contract is required and what type of cover is needed. Considerations when selecting the type of contract: Is the payment/accrual date of the underlying commitment determinable, or is there some uncertainty? What are the terms and conditions of the underlying contract of sale and is there any uncertainty regarding the adherence to manufacturing/delivery dates which in turn will have a bearing on payment/accrual dates? Is the currency quoted at a premium or discount? Is it likely that the premium/discount will increase/decrease during the life of the contract? Forward exchange contracts Advantages Forward exchange contracts offer the following advantages: They cater for a diverse type of commercial and financial transactions and both importers and exporters can make use of it. The company is protected against unfavourable exchange rate fluctuations. The exact value of the export and import order can be calculated on the day it is processed. Budgeting and costing are accurate. 4

5 Forward exchange contracts Disadvantages Once a company has covered a transaction with a forward foreign exchange contract, it cannot take advantage of preferential exchange rate movements. If an order is cancelled or there is any surplus amount outstanding on a forward exchange, it must be surrendered at the prevailing spot exchange rate, which can result in a financial loss. Early deliveries, extensions, surrenders and cancellations during the fixed period of a forward exchange contract are done on a swap basis causing additional administration The International Trade Show For most of us, our first exposure to the need for quoting in foreign currencies will be if/when we attend an international trade show or exhibition. This platform will require that you really have your ducks in a row as far as your pricing strategy is concerned there are seldom any second chances. First prize is always to quote in SA Rands (ZAR). This is the only way you can be guaranteed to receive your desired price, in Rands, at the time of the sale or order placement. Unfortunately, it is often not possible to quote in Rands because the currency is not well known internationally, and thus you will be required to quote in US Dollars or Euros, and sometimes in Pounds. If you follow the advice given in 2.2 above, you should be protected from risk but to be extra sure, make certain you include a disclaimer on all your quotes or order forms that states something along the lines of: Prices subject to change due to currency fluctuation or Pricing guaranteed for 30 days only. By adding this sales term, you will in most cases be able to negotiate with your customer should the rate change adversely and result in possible losses for you. Learn more here CODES AND CODING PRACTICE Unlike highly mechanised and technical industries like automotive parts, large scale stationery manufacturing etc, in most cases relevant to the small scale manufacturing or craft industries, there is seldom correlation between the structure of a code and the product itself. For this reason, it is always best to keep the coding system you use as simple as possible! 5

6 This means that you should avoid trying to communicate things like colours or styles in your code, rather do this in the product description or in a separate column in your price list. The more complicated your coding, the higher the likelihood of mistakes happening, either in-house or via customer orders. Ask yourself a question: does this code make a difference to either my production team or my customer in any way other than ensuring that the correct product is being ordered? If the answer is no, you simply MUST keep things simple! At most, have a letter that denotes the nature of the product (eg K for keyrings, B for bags), and then start from 001 or 0001 if you have a lot of products. This methodology can be applied across your range and is simple, effective and largely foolproof. Remember to be consistent with both a product code and the description that follows it eg K001 - Heart Keyring with beads K002 Star Keyring with beads, and so on Most importantly, remember the KISS adage when it comes to creating codes Keep it Short & Simple! C001/22/RRGB/ W 6

7 3. BUSINESS EXERCISE QUOTING IN FOREIGN CURRENCIES & CODING PRACTICE Task: You are asked to prepare a pricelist in US Dollars, for a client based in California who is interested in your products. Today s actual (spot) exchange rate is R12.50/$1. Bearing in mind that our currency fluctuates drastically, and that you need to protect yourself against this at all costs, what price would you quote the client, in US Dollars, for a product costing: R100 R150 R250 R500 Please show how you came to your US Dollar price (ie what conversion rate you used) and explain your justification for using that rate. Remember, you still need to be competitive! Please send us your calculations. 7