Accounting in foreign currencies: tips for your business

As your business grows, you may find you need to deal in foreign currencies.

This may be because you have customers or suppliers overseas or because you’re expanding internationally and accepting foreign currency as payment for your goods or services.

Overseas customers tend to prefer to deal in their own currencies, so allowing them to do so can make investing in your products and services more attractive to them.

Foreign exchange will add an extra dimension to your business accounting, making it a more challenging task.

Here’s an overview of how to manage multicurrency accounting and what you need to be aware of when you have dealings overseas.

Why might I need foreign exchange accounting?

You may find it appropriate to conduct some transactions in foreign currencies if

• You import or export goods
• You use services based overseas
• You have staff based in other countries
• You’re buying property abroad
• You’re expanding your business overseas
• You make offshore investments

However, you shouldn’t automatically use another currency just because your business is conducted in another country. First, you should check that it’s in your interests to do so.

Which currency should I use?

When doing business overseas, often you may have a choice as to whether you make or receive payments in sterling or in the foreign currency. 

Although it can make the process more complicated, it is prudent to make this decision on a case by case basis. Exchange rates fluctuate, so sometimes it will be better for you to choose the foreign currency, and sometimes not.

Equally, your clients or suppliers will also have a preference, which may conflict with yours – so you’ll have to be diplomatic in how you make this decision, depending on the relationship between you.

When you draw up contracts with clients and staff, consider discuss the currency you’ll use.

There is a risk that exchange rates may change a lot between the signing of the contract and payments being made, and this change could be in your favour – or it may not be.

You will therefore have to decide in advance which party carries the risk (which is also an opportunity).

How do I take payments in foreign currencies?

When you’re receiving foreign currencies there are several ways in which you might accept the payment.

You could set up a bank account in the other currency, or a specialist account for multiple currencies - this is your 'foreign currency account'.

Multi-currency transaction systems that link to your bank account, such as PayPal, can also do the job.

Another option is simply to invoice in the foreign currency and let your accounting system automatically translate the sums into pounds.

Do businesses pay foreign transaction fees?

Like personal accounts, business bank accounts usually charge a fee for you to transact money in foreign currencies.

These fees vary from bank to bank, and many add a mark-up on the exchange rate to make a higher profit.

Some banks and FinTech firms are challenging these fees and offering multi-currency accounts, which make it cheaper to send and receive money in foreign currencies.

If you’re often doing business abroad, it could make sense to set up one of these accounts, but do shop around to find the most suitable option.

How to invoice and report to HMRC in foreign currencies

Most accounting systems allow you to invoice customers in a different currency.

It’s usually simple to do and each payment is shown with an exchange rate and details of any fees you’ve had to pay.

The tricky part comes when you’re working out the UK VAT, because you have to show these figures in sterling for HMRC.

This means you will need to convert payments into sterling when you’re recording them in your VAT accounts.

Also any invoices you produce need to show the total net value of what you’re selling and the amount of VAT, at each applicable rate. The same goes for advance invoices.

What exchange rate do I use in foreign exchange accounting?

You will need to account for foreign currencies using the exchange rates listed on the HMRC website.

HMRC issues its own exchange rates every month, which are the figures you should use irrespective of any other fluctuations that may occur that month.

What are the risks of accounting in foreign currencies?

The main risk when you’re trading in foreign currencies is that the fluctuations in exchange rates will mean the pound is weaker.

You could lose money as a result, either because you’ll have to pay more for goods and services abroad, or because you’ll be paid less for what you’re selling.

There is a way to guard against potential profit loss caused by exchange rates. By agreeing forward contracts with your clients, you can lock in the current rate to maintain the value when it comes to the transaction.

Of course this can also work against you should the exchange rate go the other way, but it’s a way of mitigating risk and ensuring cash flow security.

Get expert financial advice

Seeking advice from your accountant when dealing with foreign currencies is one of the best ways to ensure that doing so is in the best interests of you and your business.

A financial adviser can help you to determine whether or not to deal in foreign currencies on a case-by-case basis, and recommend options like forward contracts to maximise your income and limit potential losses caused by exchange rate fluctuations..

They can also help you choose the right software for foreign accounting and the type of transactions you regularly make. They may even help you to predict exchange rate fluctuations so you can stay one step ahead. 

Unbiased will connect you with a professional financial adviser who can provide expert guidance on accounting in foreign currencies and ensure that your finances always balance.