Best Practices for Handling Multi-Currency Transactions

Find out interesting insights with Anthony Peltier, CEO c2cfinance

Moderated by Emily, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Emily: Hey, everyone, this is Emily, and I am a digital transformation consultant at Hyperbots. I’m very pleased to have Anthony on the call with me. Anthony is the CEO at Coast to Coast Finance. Thank you so much for joining us today, Anthony. We appreciate it.

Anthony Peltier: Thanks, Emily.

Emily: Today, we’ll discuss the intricacies of handling multi-currency purchases. Let’s just dive in. Anthony, multi-currency transactions are a common challenge for companies operating globally. Could you walk us through the typical scenarios where a company might face multi-currency purchase challenges?

Anthony Peltier: Yeah, definitely. As you mentioned, when a company operates globally, they may deal with vendors who typically prefer payments in their local currency. Several scenarios can arise, right? Whether you’re receiving quotes in a foreign currency, sourcing items from multiple countries, or generating global purchase orders, it’s important to think about how to manage the PO, how to handle payments, and how to record currencies in your general ledger to mitigate risks due to currency fluctuations.

Emily: Got it. When a U.S-based company deals with, let’s say, European vendors who prefer payments in Euros or GBP, how should the company decide on the currency for purchase orders and payments?

Anthony Peltier: Good question. Generally, I would recommend issuing the PO in the vendor’s preferred currency. That way, you can provide clarity on pricing and avoid complications due to rate fluctuations. Then you can make the payment in the currency specified in the PO. Of course, the company’s GL would still record the transactions in their functional currency, whether that’s USD, Euro, or whatever is standard for them. This approach balances the need for vendor payments with internal financial accuracy.

Emily: Understood. In situations where vendors provide quotes only in foreign currencies, how should a company handle this when issuing the purchase order and recording the transactions in their general ledger?

Anthony Peltier: Right. When you receive a quote in a foreign currency, the PO should reflect that currency to ensure the vendor receives the expected amount without conversion risks. Then your GL would record the PO’s value in your company’s functional currency based on an exchange rate that you’ve set up, perhaps in your ERP for currency conversion. If there are fluctuations in the rate between the PO date and the payment date, you may capture that as a purchase price variance, or if this occurs frequently, you may set up a forex gains and losses account.

Emily: Got it. Companies often source components from OEM vendors located in different countries. How does multi-currency management come into play in such scenarios?

Anthony Peltier: If you’re issuing multiple POs and managing multiple currencies, I would say issue the PO in the vendor’s preferred currency and make the payment accordingly. Your GL will convert and record these transactions in your functional currency. The real challenge lies in managing multiple exchange rates and understanding how fluctuations can impact overall costs. In such cases, having robust controls in place to track and manage these variations is essential.

Emily: Understood. That makes sense. For multinational companies with operations in various countries, how should they handle global purchase orders and the associated currency risks?

Anthony Peltier: For multinational companies, can issue the PO in either the local currency or the vendor’s preferred currency. You’ll want to record it in the local GL for the respective country where the company is operating. The parent company can then consolidate these local GLs into a global reporting currency, whether that’s USD or another currency. This allows each regional operation to manage currency risk locally while enabling the parent company to assess overall exposure and performance on a global scale.

Emily: Got it. That makes complete sense. Anthony, forex gains and losses are an inevitable part of currency transactions. How should they be computed and posted in the GL?

Anthony Peltier: If currency exchanges happen frequently, forex gains and losses are inevitable. For instance, if you issue a PO in euros and the exchange rate is 1 = $1 at the time, but when the payment is made, it’s 1 = $1.20, that additional cost would be recorded as a forex loss in the GL. Conversely, if there’s a favorable price shift, you’d record that as a gain.

Emily: Understood. How exactly can companies protect themselves from significant forex fluctuations when dealing with multi-currency purchases?

Anthony Peltier: That’s a good question. You can use hedging strategies or contracts to lock in exchange rates. Beyond purchases and vendor management, global companies must also consider how they pay employees in different currencies. If a parent company monitors forex markets, they can buy the currency needed for payments in advance to lock in favorable rates. The key is balancing risk management with cost efficiency, ensuring that hedging provides more benefits than costs.

Emily: Makes sense. Just to summarise, one last question: What role does AI, or what role potentially can AI, play in managing multi-currency transactions effectively?

Anthony Peltier: AI can be a game-changer. Automating exchange rate calculations and integrating real-time currency monitoring into your systems can make a big difference. The next step is to fully integrate this into your ERP to manage multi-currency POs, material requirements planning, payments, and GL entries. AI can also reduce manual errors. For example, someone might mistakenly move a decimal, leading to significant discrepancies. A quick story long ago when I first started working, I got a letter from the IRS saying I owed a substantial amount in taxes. It was a significant sum for me at the time, but it turned out they had moved a decimal point by mistake, leading to confusion. With AI, you can reduce such errors, predict currency movements, and make more informed decisions about currency conversion.

Emily: Got it. Thank you so much, Anthony, for joining us today and sharing your insights. Handling multi-currency purchases requires a strategic approach, combining financial acumen with the right tools and processes. Thank you for shedding light on this topic.

Anthony Peltier: Absolutely. Managing those transactions effectively is crucial not just for financial stability but also for supporting business operations on a global level, right?

Emily: Alright.Thank you.