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Creating More Accurate Cash Flow Projections

International business owners rely on cash flow forecasts to understand the expected performance of their companies, from accounts receivable to inventory. But when a business operates overseas, and incoming and outgoing cash is impacted by foreign currencies and exchange rates, an accurate forecast is even more essential.

How a Cash Flow Projection is Calculated

Brian Parker, partner at Hyde Park Wealth Management LLC, a boutique wealth management firm based in Cincinnati, Ohio, says a cash flow projection is calculated as follows:

1.     List expected outflows, including: expenses, capital expenditures, loan interest/repayments, supplies/materials, etc.

“You need to always understand what the latest and greatest projection of your cash is and how you can improve, especially when dealing with foreign exchange.”

— Bob Stark, vice president of strategy, Kyriba

2.     List expected cash inflows, including: sales, loans taken, owner cash inputs, etc.

3.     The difference between expected outflows and inflows yields net cash flows

An international business can project what cash will look like over a 12-month budgeting period by first understanding how foreign exchange rates will impact business expenses. Here are a few best practices for creating precise cash flow projections when doing business overseas.

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Negotiate Exchange Rate Adjustments

When forecasting cash flow on an international scale, the values of receivables and payables are subject to unforeseen currency value fluctuations in the foreign exchange market. That's why it's crucial for business owners to negotiate adjustments around an agreed upon, budgeted rate in their contracts with foreign trading partners so expectations for future prices are set and understood, Parker says.

To pinpoint their rate, business owners may look at how a particular exchange rate has fluctuated over the course of the previous year and select a targeted rate around that number.

On the other hand, "some people will take the rate on the first date of the year and use that to budget because that's what level it is when they start the new tax year," says Steven Hunter, head of small enterprises at Western Union Business Solutions.

However, Hunter doesn't necessarily agree with this approach. "The markets are constantly moving and it would be beneficial to review the rates against a budgeted rate on a regular basis. If the live rates fall below your budgeted rate you will start eating into your own profit margins."

Use Hedging to Maintain Profit Margins

Once a business owner has a rate in mind, he or she can book a bid. A trusted online foreign exchange service can help proprietors place bids and potentially benefit from currency value fluctuations that occur overnight and during early morning trading sessions. This can allow businesses to secure a desired exchange rate and, ultimately, make better cash flow projections.

Assess Forecast Accuracy

International businesses should also frequently compare their forecasts to what actually happened for that time period. This measurement is the key to achieving an accurate cash forecast. "You need to always understand what the latest and greatest projection of your cash is and how you can improve, especially when dealing with foreign exchange," says Bob Stark, vice president of strategy at Kyriba, a treasury management solution provider headquartered in San Diego.

When international businesses partner with a trusted online foreign exchange service that provides euro conversion calculation and 24/7 access to their transaction history, it's easier to see the historical and current status of cash inflows and outflows. And by gaining a better understanding of a company's actual cash flow, business owners can make better preparations for the future. 

Live Cross Rates

USD 69.2140 1.3102 0.7847 53.3150 1.0000 0.8805
CAD 52.7990 1.0000 0.5987 40.6750 0.7626 0.6718
AUD 50.1090 0.9483 0.5680 38.6030 0.7234 0.6374
EUR 78.5490 1.4869 0.8906 60.5130 1.1343 1.0000
GBP 88.1480 1.6687 1.0000 67.9070 1.2730 1.1216

Example: 1USD = xx INR

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