The Founders’ Guide To Trading In Foreign Currencies

8 October 2019

With more and more companies trading online, being able to accept foreign currencies is becoming a must, but it comes with some accounting requirements.

advice : Bookkeeping and Strategy

As tech and tech-enabled business typically do not face the geographical barriers that traditional companies used to struggle with, expanding overseas became a very common path for start-ups to scale and reach wider audiences abroad. However, especially for B2C companies, this often requires the implementation of a system that allows customers to pay in foreign currencies.

Leaving out the additional degrees of uncertainty created by fluctuating exchange rates, how can you effectively manage foreign sales in your accounts?

Should you accept foreign currencies as payment?

Whether you run a SaaS company, an e-commerce platform or an online retailer, allowing customers to pay for your products and services in their own currency is proven to increase sales abroad. This is because customers could incur additional fees for paying in a different currency from their own account. Additionally, prices that have to be converted to another currency constitute an obstacle within the customer’s evaluation stage, which can be confusing and unappealing.

Several online payment processors, such as Stripe, offer the possibility of displaying prices in users’ home currency, but since the actual transactions are still processed in your own currencies, your customers will incur additional fees charged by their bank or credit card issuer, making your products and services more expensive.

The solution to this is establishing a system that allows you to accept payments in one or multiple foreign currencies. This might translate into opening foreign bank accounts, which can be costly and inconvenient.

Alternatively, using online accounts such as PayPal could allow you to accept transactions in multiple currencies, but this kind of services will typically charge you a transaction fee for each payment.

How to save money in transaction fees

Opening up a foreign account is not always the best option, especially if you are planning on transferring foreign sales to your home-currency bank account. Not only will banks often require your physical presence in a branch to complete the paperwork and charge you a monthly fee or a minimum deposit, but the banks’ exchange rates are typically unfavourable compared to market rates.

Virtual accounts services like PayPal offer great flexibility and can be managed online entirely. However, they often convert currencies at their own rates, which are usually more favourable than the one offered by traditional banks, but still less favourable than the market rate. Additionally, these services typically involve transaction fees – which can be fixed or a percentage of the transaction value, which eventually erode your profit margins or force you to raise your prices.

FinTech start-up TransferWise was born with the aim of eliminating such headaches. They offer a free, online multi-currency account which provides different account details for the US, EU, UK and Australia, effectively enabling you to accept and process payments in four of the most used currencies worldwide. Additionally, you can then transfer funds between your accounts at market exchange rage, only charging a small conversion fee that is usually under £1.

Accounting and invoicing in a foreign currency

As multi-currency accounting becomes more widespread, cloud-based accounting systems such as Xero have incorporated multi-currency features in their own invoicing systems.

However, it’s important to remember that regardless of what currency you use in your invoices, you still have to file accounts in pounds sterling with HMRC. This means you’ll have to convert your invoices and the money you receive. As exchange rates fluctuate over time, you may find yourself with more or less pounds in your bank account compared to what you previously planned.

The above is also true for UK VAT purposes.

Accounting with multiple foreign currencies

As mentioned in the previous paragraph, everything you buy or sell in a foreign currency must be recorded in your books in pounds sterling. The exchange rate to be used is determined by financial reporting standards – not by HMRC. For small entities, the standard is “the exchange rate in operation on the date on which the transaction occurred; if the rates do not fluctuate significantly, an average rate for a period may be used as an approximation”. This leaves you with relative freedom over where to find a relevant exchange rate. and Yahoo Finance are usually good sources.

When it comes to preparing your balance sheet, you should also convert any balance from foreign currency accounts into pounds sterling using the exchange rate in force on the balance sheet date. This include bank accounts, online accounts (such as PayPal) and any receivables from clients paying in foreign currency.

The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.