Abhishek Sengupta

Entrepreneur | Author | Podcaster

Currency Fluctuation & Impact On Business

Currency Fluctuation & Impact On Business

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Currency Devaluation affects the businesses in some way or other. Some get direct impact some get indirect impact. News has a lot of articles reporting about the devaluation of currencies of different countries. Some show currency fluctuation on periodic basis. Very common question comes, does it affect the businesses in any way. The answer is yes ! Not only businesses, everyone’s life is also affected by this in some way or other.

Let us analyze this impact in business!

Direct Impact: Many businesses get direct hit in case of appreciation or devaluation of currency. This may come in many ways. However, there can be three main ways.

1. Company is purchasing products from country: In other words, it imports. If the currency devaluates. The company has to pay additional amount for same good or service. In this situation business unit’s cost of procurement increases in this case. This might lead to loss making situation at times. In another situation if the currency appreciates, then company has to pay less for the same product or service. This reduces cost of procurement. Former is unfavourable for business whereas later is favourable.
2. Company sells products to a foreign country: On other wars, it exports. For such types of business houses the impact will be just opposite. If the currency devaluates, the business will receive more local currency for any billed amount. This will increase the revenue as book of accounts are maintained in local currency. At the same time if the currency appreciates, the business will receive less amount in local currency for the same billed amount. This might lead to less revenue.
3. If the company has borrowed money from foreign institution: The amount to be repaid or EMI will be get affected. Same way the interest amount, will change if the exchange rate changes. Here devaluation will mean more amount to be paid in local currency and vice versa.

Indirect Impact: Many businesses might not get a direct impact, but gets a hit in indirect way. This is a most common impact

      Fuel Cost: Many industries require fuel to perform. Most of the countries a major part of the fuel comes up from abroad. This is import based item. So currency fluctuation has some major role in this. If the currency appreciates, the fuel import will cost less for the country, leading to low fuel price. This reduce the operating expenses for the for the company. Other the other hand if the currency is devalued, fuel cost will be high for the country, leading to high fuel price. This is increase the operating expenses for the country.

     Transport Cost: Almost every industry require transport in someway or other. This is directly related to the fuel cost, which in turn depends on currency values. Currency devaluation causes higher fuel price and in turn increasing the transport costs for business units and vice versa.

Commutation cost: Company officials has to move to different places for various work. If the fuel cost goes high the cost of operation of the business to goes high and vice versa. This can affect taxi fare, airfare etc. All these will be a positive and negative impact on the costing sheet of the company
 Raw material cost: Raw material requires fuel either for processing or for transporting. Fuel cost which is highly dependent on currency fluctuation, will impart an effect on this. If the raw material cost goes up, cots of operation and cst of sale of the company too goes up and vice versa.

Processing cost: Most of the factories and other processing units use fuels in some way of other. They use electricity as well. If the fuel cost fluctuates then the processing cost too fluctuates. This will have an impact on the business units

Generation cost: Generation refers to creation of items or services. Generation requires either electricity or fuel. Currency value affect both electricity and fuel cost. This can impart an impact on the generation cost of business units.

Electricity cost: Electricity is required by almost all business units. In most of the countries electricity is generated by fossil fuels. If a country depends on the import for fossil fuel. Then the electricity cost might increase due to the currency fluctuation. However in many countries electricity rates are regulated and sudden changes are not expected.

So, most of the businesses will be affected by the currency fluctuation in someway or other. Impact will be either direct or indirect. So it is important for businesses to strategize themselves for such changes.