Foreign exchange can have far-reaching implications on the financial performance of a company. While some of the foreign exchange fluctuations can be predicted and hedged against, many times companies are hit hard with unexpected and highly unfavorable fluctuations. While you may not be able to help much with your client’s foreign exchange risk, it is important to know how and by how much your client’s earnings are impacted by foreign exchange exposure.
Vulnerability
Companies who are vulnerable to foreign exchange exposure, face higher earnings volatility, and therefore have to be more agile to maintain profitability. Today most companies are looking to sell their product and services overseas, mostly within emerging markets, to expand their reach and bring in additional sources of revenue. Unfavorable variations in foreign exchange can directly impact overall revenues and profit margins of such global companies. When a company’s home currency strengthens, their sales abroad are worth less when translated back into the company’s home currency. Similarly, companies also import from international countries. In these cases, when the company’s home currency weakens, value of imports increase.
Outsourcing
In addition, companies are increasingly outsourcing to developing countries and setting up their own operations. For example, Abbott Labs is a company with global operations, where nearly 70 percent of the company’s total sales are sales outside of United States. In their latest fiscal year, 2014, Abbott’s net sales growth was 3%, made up of a volume contribution of 6.9%, and offset by a price impact of negative 1.4% and foreign exchange fluctuation of negative 2.5%. The strengthening of the U.S. dollar relative to several international currencies impacted the company’s sales growth. For Abbott Labs, the negative 2.5% foreign exchange fluctuation, translated to a loss in revenue dollars of 490 million. Applied to their operating income margin of approximately 14%, this resulted in an earnings loss of approximately $70 million. Knowing that your client’s profitability is impacted by currency fluctuations can help you start the conversation on how to help the client make up for its losses elsewhere.
Final Thoughts
In the case of Abbott Labs, if your solutions could improve their procurement cost, demonstrate this by applying the industry median for procurement cost for a company of the size of Abbott Labs, and show how just a 1% improvement in total procurement cost could improve earnings by approximately $40 million. That is a substantial recovery of their earnings loss from foreign exchange impact. In summary, know the impact of any negative foreign exchange fluctuation on your client’s performance and how much your solutions can offset that impact.
