onsdag 9 april 2014

Exchange Rates 101

(The photos in this blog post really do not have much to do with the subject, but I figured that your eyes might need a break from the Wall of Text every so often... especially since the subject is pretty darn boring. You can thank me later.)

For a long time I accepted payment in US dollars. More than anything it was as a courtesy towards my US customers (I'd say that about 95% of my work sells to the US) as it made it easier for them not having to deal with exchange rates. Unfortunately I've recently had to revise that policy, and I no longer accept payment in any currency but my own, which is the Swedish krona (SEK). I'm going to try and explain why, as well as do my best to help you understand what exchange rates are. So let's dive in!

A simple definition of exchange rate is "the price of a nation’s currency in terms of another currency". See, on the international market, not all currencies are worth the same. One Swedish krona doesn't equal one US dollar, just as one Canadian dollar doesn't equal - again - one US dollar. Also, most exchange rates are floating rather than fixed, meaning that the value of currencies fluctuate up and down from day to day. Some currencies are very stable, others go up and down like roller coasters. Certain factors can influence the value of a currency, such as war, national debt, etc. If a country is perceived as having financial problems, the value of its currency usually takes a hit.

I really recommend that you read this article as it explains som basic concepts in an easy-to-understand manner. If you would prefer to watch a video I found this one which does a decent job of explaining things. Unfortunately I can't embed it, so you will just have to scamper off to YouTube...

How accepting payments in dollars has/would/could affect my sales


Our house, in case you were dying to know.
So what's the problem with accepting payment in dollars, you ask? Well, imagine that the US dollar to Swedish krona exchange rate is $1=SEK 10 on, say, January 1st. If I sell a model for $1,000 on that day and it is paid in full, it means that I receive SEK 10,000. With me so far? This is all well and good, simply because it is a one-time payment. However, if the buyer would like to do time payments and pay $100/month for ten months, then all sorts of things could happen.

Let's paint a worst-case scenario (for simplicity's sake I'm not including the extra charges I add to time payments, or any of the PayPal fees or taxes involved):

January: $1 equals SEK 10, so $100 results in SEK 1,000 for me. Great!

February: The dollar drops in value, so now $1 equals SEK 9. The buyer is paying the exact same amount ($100), but I'm getting less (SEK 900) than I did the month before.

March: The dollar takes a nosedive, and $1 is now worth a mere SEK 6. Again, the buyer pays $100, but I receive just SEK 600, close to half of what I received just two months earlier.

The dollar keeps spiraling downwards, and by October it's not worth more than a mere SEK 2. By now you should be able to do the math. By the time the customer has paid off the model, I will have lost a substantial amount of money as compared to if it had been a one-time payment.

This is a drastic (and not very realistic) scenario, but it shows how a drop in the US dollar value can severely affect how much I end up getting paid. Who wants to accept time payments if it means the risk of getting less and less with each payment? Not me, that's for sure.

Most of the time currency fluctuations are quite subtle - an extreme drop such as the one I used as an example above is rare. However, for a self-employed, small business owner like myself, even subtle fluctuations can make quite a bit of difference. If model horses were a hobby for me, and if the profit was just "fun money",  I wouldn't care less about a bit of loss here and there. But it isn't fun money. It's my mortgage, my food, my insurance, my life. When my livelihood is in the balance, I can't afford to be nice. I don't think you could either.

So what's going to happen now?


I promise. It doesn't.
Well, as mentioned all sales will be done in Swedish krona (plural kronor).

If you're interested in buying something from me, if you plan on paying via PayPal and if you need help with currency conversion, please use their own converter. There are no "absolute" currency conversion rates - banks and companies are actually free to set their own. Therefore it is always best to check with the bank or company you plan on using when making your payment. To find out the exchange rate you will be charged by PayPal, log in to your PayPal account and go to the “My Account” tab.  Then select “Overview”. In the top right hand corner a link called “Currency Converter" will calculate the current exchange rate. Again, please remember that the exchange rate has a tendency to change daily.

The vast majority of my customers pay via PayPal, and PayPal does all the math and exchange work when you pay me. When you receive an invoice from me they will inform you just how much you will be charged in dollars (or whatever your currency is). There's no need to do anything special. You don't need to call your bank, or change your settings in PayPal, or any some such. Just pay the invoice. You will be charged in dollars, and I will be receiving Swedish kronor at my end. Very convenient.

But (there's always a but), you need to be aware of a few things:

If you are going to do a one-time, full payment you really need not give the matter of exchange rates a whole lot of thought. If you're paying via PayPal, just check their going exchange rate and you'll know how much you'll end up paying in dollars (or whatever your currency is).

However, if you're going to do time payments, you definitely need to sit down and do a bit of math. Remember, the exchange rates fluctuate... and over a longer period time it may or may not be to your advantage. Just so we are totally clear on how this could affect you, I'll draw up a scenario very similar to the one above (but with more realistic numbers):

Imagine that you're buying a horse that is priced at SEK 10,000 (again, for simplicity's sake I'm not including the extra charges I add to time payments, or any of the PayPal fees or taxes involved). We agree on a ten-month payment schedule, meaning that you would be paying me SEK 1,000 per month.

In a worst-case scenario, the dollar would keep going steadily downwards in value. This is not likely, but you should be prepared for it (because bad things happen to good people on a regular basis).

Month 1: SEK 10 equals $1.52 , meaning that for every ten Swedish kronor you pay $1.52.
SEK 1,000 thusly equals $152 and that is what you will be charged.

Month 2: SEK 10 equals $1.60. In other words, SEK 1,000 equals $160, and that is (obviously) what you will be charged.

Month 3: SEK 10 equals $1.65, so you will be paying $165. I, on the other hand, still receive SEK 1,000.

You see the trend, right? I am unaffected - I still get the exact same amount, but what you pay in your dollars is increasing.

It could go the other way around though - the dollar could steadily increase in value. In such a case you would be paying less and less with every passing month (and wouldn't that be nice?) while I - again - still receive the exact same amount we agreed upon.

Most of the time you'd get a little bit of both. You might end up paying $150 one month, $145 the next, and $153 the third and so on. It is absolutely impossible to know this ahead of time. No matter what, you need to be prepared for an increase in your monthly cost. Please don't agree to a time payment schedule that you feel would be hard to keep up with even at the best of times and with the exchange rate remaining at an absolute standstill. Because let's be really, really clear about this:

Exchange rate fluctuations is NOT a valid reason to cancel an on-going time payment agreement!

It is your responsibility to be prepared for an eventual increase in your monthly cost. If you still back out, you lose whatever payments you have made. All time payment agreements will include a clause that states that you waive all rights to apply for refunds and/or chargebacks. Again, this is my livelihood and I cannot afford to let money sit in my PayPal account for months and months just in case you change your mind (for whatever reason).

Last words...


Well, I hope I this has helped you a little bit! If you're not used to dealing with exchange rates, then I'm sure this seems like a lot to take in. It really isn't that difficult though - the most important things to remember is that a) $1 does NOT equal SEK 1, b) that you should consult a currency converter so that you know what the going exchange rate is, and c) that it is your responsibility to make sure you can cover exchange rate fluctuations in case you do time payments.

I am more than willing to help you out if there's something you don't understand, just holler. When I put something up for sale I will make sure to provide a rough estimate in dollars as well, to save you a minute or two.

Whew! That should be it! Pat yourself on the back for getting to the end of this not-so-amusing blog post. I promise I'll try to make the next one about horses. :)


Inga kommentarer:

Skicka en kommentar