Demystifying FX for Indian businesses

The rise of remote work, e-commerce marketplaces, increased sourcing of Indian goods by global giants, and favorable government schemes have enabled both individuals and SMBs to tap into the global market.

A Nasscom Aon report projects India’s gig workforce to hit 23.5 million by 2030! Additionally, Indian SMB’s contributed 43.59% of all exports in 2023.

However, international expansion brings with it a unique set of challenges. Particularly when receiving payments from abroad.

Grappling with the complexities of Foreign Exchange (FX) can be crucial when businesses or individuals go global.

High Forex fees, unpredictable exchange rates, and hidden transaction charges can significantly eat into profits, turning what should be a rewarding experience into a financial burden.

To shed light on these challenges and provide actionable solutions, we sat down with Abhijit Chandrasekaran, co-founder of Xflow to understand the impact of FX on the business.

With his extensive experience and deep understanding of both the Indian and global financial landscapes, Abhijit offers valuable insights to help Indian freelancers and SMBs navigate the complex world of international payments and Forex.

We began our conversation by asking Abhijit to explain Forex in simple terms. He describes it as follows:

"In simple terms, Forex management is the process of managing finances in different currencies. Let's say you're a business owner or a freelancer operating in India. Your expenses are all in Indian Rupees, but your customers are from around the world and prefer to pay you in their local currency, like dollars or euros. You need a way to collect these foreign currencies and convert them into Indian Rupees and manage your finances."

Drawing from his extensive experience, Abhijit offers seven key tips for freelancers and SMBs to navigate the Forex landscape effectively:

1. Focus on predictability over timing - When it comes to Forex transactions, having a clear sense of predictability can significantly lower the risks associated with currency fluctuations and diminish financial uncertainty. This stability empowers you to handle your finances more confidently, free from the worries of erratic market shifts.

Abhijit explains: "The Forex market is tricky, especially when trying to time it for the best exchange rates. Even professionals find this challenging. My advice? Focus on predictability rather than timing. If you're cautious about market volatility, convert your revenues to INR—or your functional currency—immediately upon receipt. This minimizes risks associated with currency fluctuation."

• Understand settlement terms - To effectively navigate currency exchanges, it's useful to understand some of the key settlement terms, such as:

Spot rates: These are the current rates for immediate currency exchanges, typically settled within two business days.

Forward rates: These rates lock in an exchange rate for a future date, protecting against adverse fluctuations in the market

"Spot rates represent the current prices for immediate currency exchanges, usually completed within two business days. Forward rates, on the other hand, secure an exchange rate for a future date, shielding you from adverse fluctuations, explains Abhijit. He adds, “At Xflow, we’ve solved for the settlement time by enabling users to receive funds in 1 business day.” 

Overall, Abhijit advices:“To optimize for cost it is good to have a good understanding of the industry terms. This essentially helps businesses like yours choose the best transaction type based on your requirements and timelines.”

• Balance risk and reward - Embracing a certain level of risk can pave the way for significant gains, especially when exchange rates shift in your favor. But balance is key. 

On managing risk, Abhijit advises: "If you're open to a bit of risk and want to potentially benefit from market movements, use tools like forward contracts or monitor spot rates to decide the optimal times to convert. The goal is to achieve as much predictability in your cash flows as possible. For instance, if you're expecting a $10K payment in a month, locking the conversion via a forward rate now gives you financial clarity—you'll know exactly how much INR you'll receive. This helps you plan expenses and business costs without surprises."

• Simplify your approach - Foreign exchange rates are affected by a variety of factors. To make things easier, focus on aspects within your control. Ensure that your transactions align with your business requirements to minimize unnecessary risks.

"Understanding all the factors that influence Forex rates can be overwhelming. Unless managing Forex is your main business, it's best to simplify your approach. Focus on what you can control and align your transactions with your business needs to avoid unnecessary risks.”

• Prepare for growth - Expanding into new markets can open new avenues for growth and expansion, However, if your income and expenses don’t align across different currencies, it can create unforeseen financial strains that threaten to eat away at your profits.

Looking ahead, Abhijit notes:"As your business grows, the challenges of managing different currencies will increase. A mismatch between the currencies you receive and those you spend can impact your business. Eventually, you might need to set up a treasury function to manage these efforts with expert help. Until then, keep things simple and aligned with your immediate business needs."

• Expand with confidence - The global market is brimming with incredible possibilities. But, the ups and downs of currency fluctuations can pose a serious challenge, affecting profitability and the cash flow. To fully capitalize on international opportunities while maintaining financial health, it's important to grasp the risks associated with currency movements.

Abhijit advises, "The Forex market is known for its volatility; the dollar might be relatively stable against the Euro but more volatile against the Indonesian Rupiah. To navigate these complexities, work with currencies that make a significant impact on your business. This will help you expand globally with confidence."

Leverage technological platforms -Technology can be a game-changer for multi-currency management. Freelancers benefit from hassle-free invoicing and payment collection, while small and medium-sized businesses enjoy smoother financial operations, fewer mistakes, and enhanced visibility into their cash flow.

Abhijit shares, "Platforms like Xflow work closely with banking partners to secure and present the best rates transparently. This allows you to lock in rates immediately after invoicing so that you know exactly how much INR you'll receive. This simplifies every step—from rate locking to the final compliance documentation—making it seamless for businesses to manage their Forex needs without worrying about the underlying complexities.”

By prioritizing predictability, understanding settlement terms, balancing risk and reward, simplifying approaches, preparing for growth, expanding confidently, and leveraging technology, you can significantly reduce the financial strain from Forex fees and hidden charges.

Abhijit emphasizes, "The world is your oyster! Don't let FX uncertainties hold you back. Take control of your financial future by evaluating your current FX strategies and implementing these tips. This proactive approach will help you retain more of your hard-earned income and set the stage for global success."

1.How to save on FX costs?

Understanding payment terms empowers you to make informed decisions that minimize FX costs. Here's how:

• Negotiate invoicing currency: By understanding exchange rates and potentially reducing the impact of fluctuations on your earnings, you can negotiate to invoice in a currency more favorable to you.

• Consider early payment discounts for your clients: Understanding FX fluctuations can help you decide if the discount outweighs the potential currency movement, potentially saving money in the long run.

• Set clear payment deadlines: Delayed payments due to complex currency exchange processes can expose you to unfavorable exchange rates when you finally receive your money. Clear deadlines encourage faster payments and minimize this risk.

2.What are the best ways to stay informed about FX rate fluctuations?

• Staying informed about FX fluctuations is crucial for managing your international business effectively. Major financial news websites like Reuters, Bloomberg, or The Economic Times provide real-time currency quotes and market analysis.

3.What are the factors that influence Forex or FX?

Several factors impact FX rates. Here, we’ve highlighted some of the key elements for you:

• Market supply and demand - The exchange rates fluctuate based on the supply and demand. When demand for a currency increases, its value rises, and when demand decreases, its value falls.

• Interest rates - The relative difference in interest rates between countries is a primary driver of exchange rate movements. Currencies with higher interest rates tend to attract more investment, increasing demand for that currency and causing it to appreciate. Conversely, currencies with lower interest rates may see depressing demand and cause the currency to depreciate.

• Macroeconomic conditions - Factors such as economic growth, inflation, political stability, and government debt can impact a country's currency value. A nation with a flourishing and steady economy instils trust in its currency, leading to a stronger exchange rate. Conversely, political unrest or economic instability can decrease confidence and devalue the currency.