How Microsoft Dynamics NAV Can Turn Ever-Sharper Foreign Currency Fluctuations to Your Advantage

Before the global economic recession became apparent earlier this year, the Euro had been growing stronger compared with the U.S. Dollar. But now that the U.S. economy is recovering, and the foundations of the European Union economy have been shaken by the bankruptcies or near-bankruptcies of several countries such as Greece, things are changing rapidly. The Euro has been through a sharp decline, while the U.S.Dollar has grown stronger, and the Swiss Franc has maintained its strong and stable rate.

If you are only doing business within the borders of your own country,  you at least don't have to worry about currency exchange rate fluctuations. However, the likelihood that you only have domestic suppliers and customers in this global economy is remote. More likely, you are either making or losing money because of currency fluctuations. And there is seemingly nothing you can do about it. Except, in fact - you actually can do something about it.

According to IAS (International Accounting Standard) 21, currency exchange is defined as "exchange differences arising when monetary items are settled or when monetary items are translated at rates different from those at which they were translated when initially recognized or in previous financial statements".

In plain English, currency exchange gains represent the difference between local currency amounts of the same foreign currency amount at two different dates. The situations in which exchange gains or losses are generated typically occur when exchange rates differ at the invoicing date and the payment date; or the invoicing date and the period closing date. For example, if a purchase invoice of €1,000 is invoiced at the rate of 1.25, and paid at the rate of 1.35, then the liability is registered at $1,250 and settled at $1,350. The difference of $100 is registered as exchange loss.

Currency exchange rates can have profound effects on business profitability. When your business is tied to a foreign currency, the exchange rate fluctuations over time have similar effects as interest rates. For example, if you do business with foreign suppliers in a currency for which the exchange rate is consistently rising, the later you pay, the more exchange losses you'll have. Similarly, if you do business with foreign customers in a currency for which the exchange rate is consistently falling, the longer the payment collection time, the more exchange losses you'll have.

There are actions you can take to reduce the negative effects (or increase positive effects) of exchange rate differences. For example, if you expect significant exchange losses with your foreign customers, you can reduce your due periods, and thus motivate customers to pay earlier. Another action you can take is change the currency to which your business is tied from one where exchange rates are generating losses in the long term to one with a more stable exchange rate.

To appreciate exactly which action should be taken and when, you need to fully understand the effects foreign currencies have on your business. Is it gains, or is it losses? What's the scale of it? A wrong move and you can easily make a bad situation worse.

For users of Microsoft Dynamics NAV, controlling the effects of foreign currencies is fairly straightforward. Dynamics NAV comes packed with foreign currency handling features that you can configure and use to your advantage in unfavorable foreign business scenarios, and in fact decrease losses, improve cash flow, and even increase the volume of the business.

Every foreign currency transaction in NAV is handled in both original (foreign currency) amount, and translated local currency amount, with the actual exchange rate at the posting date of transaction. When amounts are settled (e.g. during application of a payment to an invoice), local and foreign currency amounts are settled separately, and any remainder of local currency after foreign currency amounts have been settled, is automatically booked as either exchange gain or exchange loss. Thus, no manual actions are needed to keep track of exchange gains or losses.

NAV allows each foreign currency's gains or losses to be tracked in separate accounts, thus giving you a clear picture of the scale of your losses or gains per currency. This can serve as an indispensable aid in understanding which foreign currencies are favorable to you, and which aren't. Most often, currency exchange gains and losses are tracked in the same gain or loss accounts, but by separating the accounts by currencies, and by keeping a close eye on the net change in these accounts, you can actually control your efficiency in enhancing currency exchange gains, or reducing losses.

In addition to this, NAV makes it very simple to keep track of any settlements that have led to currency exchange gains or losses. This information can be further analyzed by comparing the period length, and understanding where currency exchange gains or losses could have been increased or avoided depending on the payment term length.

To conclude, the effects of high fluctuations of currency exchange rates can be detrimental to your business, but NAV can give you clear insight and proper understanding of those effects and help you reduce the negative ones or enhance the positive ones.