Let’s assume I’m a UK-based company and I report my financials in GBP. 

I signed a contract in January 2023 with a German customer for EUR 300,000 over 24 months. At the time of contract signing, this was worth GBP 265,486. 

• The purple line is the historic GBP/EUR exchange rate for 2022 and 2023. 

• The neon line is a simulated randomly generated GBP/EUR exchange rate for 2024. 

• The red stars are the days I get paid EUR 25,000 from my European customer.

Example 1 - Revenue recognised at contract signing and customer payments are receivables

• From an accounting perspective I recognised EUR 300,000 (GBP 265,485) at contract signing.

• For the first months of 2023, I’m took small losses on the GBP/EUR rate, around GBP 100/month.

• By late 2023 and into simulated 2024, I’m taking GBP 1,000 to GBP 1,500 losses each month.

• Overall, I take a loss of GBP 20,101.56 over the course of the contract. That’s ~15% of the total contract value, assuming I convert all EUR receivables to GBP at time of receipt.

Example 2 - Revenue recognised monthly when I get paid

• I estimated my contract value at GBP 265,485.

• I expected GBP 22,223.80 in revenue each month at the time of contract signing.

• For the first few months of 2023, I wasn’t far off projection with revenues of GBP 22,178.85, GBP 22,030.31 and GBP 22,007.33. 

• By the later half or 2023 and into simulated 2024, my monthly revenues come in closer to GBP 20,700 to GBP 20,800 and I’m missing projections by nearly 15%. 

Summary

That’s an example of one contract. Now multiply that by the number of European customers you have. Numbers can get significant. 

I don’t recall a single conversation with a customer when they told me that they actively tried to sign contracts in EUR, USD, JPY, etc. because they had a thoughtful view on strengthening exchange rates. 

Most of our customers don’t want to take currency risk at all. They want to find the best customers and to hire the best talent around the world. Currency risk is just a necessary evil that comes along with international expansion. 

But you don’t need to just be a helpless victim of exchange rates. You may not be able to control the global economy, but you can use currency hedging to make your finances more stable and predictable.