Just because your business is in the UK, it doesn’t mean it can’t have bank accounts in currencies other than GBP. It could also have bank accounts in US dollars, Euros, or any other currency for that matter. Why might you want to do that?
We don’t invoice in currencies other than GBP. But if we did send an invoice for €800 to a customer, and they made payment to our (GBP) bank account, the bank would convert the €800 into GBP at whatever their own exchange rate was that day. Maybe we’d receive more pounds than €800 would have bought when we sent the invoice, maybe we’d receive less. We’d be taking some risk though.
If we were raising lots of invoices like that, we might decide to open a Euro bank account. That way, our customer would pay €800 and we’d receive €800. If we then immediately transferred that into our main GBP bank account, we’d be in exactly the same position as before and it would have been a waste of time. But there are a couple of reasons why we might not do that.
First, we might have costs in Euros as well. If we needed to pay €700 to a subcontractor, we could do so from the Euro account. Then we’d have only €100 left, and the consequences of getting hit by a poor exchange rate are only one eighth what they were before (of course, the possibility of cleaning up because of a good exchange rate are also lower, but we’ve got rid of the volatility). At this level it would be silly to do that of course, but if you’ve $1m of income and $800,000 of overheads each year, limiting the exchange risk to the net $200,000 might be very smart (in an extreme case, you could get the worst of both worlds otherwise and do badly on converting both the income AND the costs from GBP, getting hit by bad exchange rates on $1.8m of transfers!).
Second, even if you’ve got no costs in that currency, you might just want the flexibility to convert to GBP when you want to, not when the payments happen. Maybe you feel like you’ve got a good handle on how exchange rates are going to move, or maybe you’ve observed a pattern and you’re happy to transfer money into GBP whenever the exchange rate hits a certain level.
For most UK businesses, it’s probably not worth it. But the more foreign currency that’s flowing through your business, the more it’s worth thinking about.
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