Pricing your products for global markets
The effect of foreign exchange on pricing
Exporters that find pricing difficult due to foreign exchange fluctuations should take note of movements that may affect their profitability.
The current strength of the AUD dollar looks set to continue on back of improving consumer and business sentiment, better than expected unemployment numbers and the Reserve Bank’s decision to lift the official cash rate by 0.25 percent to 3.25 percent in October.
Exporters need to be aware of the risks associated when the Australian dollar is moving higher and understand the impact to their Australian dollar cash flows. A key question every exporter needs to ask is: what is the impact on my cash flow for every one percent move higher in currency prices?
The primary objective of foreign exchange risk management is to minimise potential currency losses and not to profit from foreign exchange rate movements. For exporters with defined inward cash flows, they can look to minimise these risks by locking into foreign exchange forward exchange contracts or foreign exchange options to take advantage of favourable foreign exchange prices now, best used when consistency of inward foreign payments is known.
An alternative is to have your customers pay you in Australian dollars thereby removing the currency risk. While not for possible in every situation, it can be an effective short-term option in managing larger or one off foreign payments.
—Jason McClintock, senior manager FX Trading, at American Express Foreign Exchange International Payments (www.americanexpress.com.au/fxip)
Costing cargo
Understanding your freighting costs will go a long way towards providing a suitable price for your goods. International freight providers should be able to supply a firm price for all exports. The price should be in a nominated currency and ideally in Australian dollars. Exporters should also be aware of the current fuel surcharge, which generally change on a monthly basis.
In addition to the actual freight charge, service providers have the capability to advise exporters of any additional charges. Exporters should ensure that they fully understand these charges, which can include customs disbursements (for high value shipments), quarantine charges, delivered duty paid administration fees, storage charges and so forth. Exporters should ask their service provider to produce a rate card that includes all of these costs and then reconcile that rate card on receipt of the invoice.
It’s a good idea to record the total cost of freight per export shipment then divide that cost by the shipment weight: the chargeable weight, which is the higher of the volumetric or dead weight. In doing this, exporters will quickly build an accurate freight cost data base on a per kilogram basis, which allows for accurate costing and margin management.
—Ross Gluer, general manager International, at TNT Express Australia (www.tnt.com.au)
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