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In today’s global economy, companies looking to grow their business should consider sourcing and selling in foreign markets. Whether the organization is a subsidiary of a foreign company or a U.S.-grown business looking to expand overseas, the treasury team needs to understand all their alternatives for structuring foreign payments and receipts.

Handling overseas financial transactions is no easy feat. Managing currency exposures, pricing, foreign bank services, and overseas counterparty risks may leave any domestic treasury staff feeling overwhelmed. Here are some key considerations for managing corporate finances in a foreign country.

Currency in the Supply Chain

First, it’s important to address the question of which currency to use in transacting with foreign counterparties. Consider the decisions a U.S.-based organization makes in building a supply chain abroad. Many such companies believe they can eliminate foreign exchange (FX) risk by conducting international transactions in U.S. dollars. Unfortunately, the truth is that FX volatility risk is always present. By transacting in its own functional currency, a U.S.-based business ends up passing on the FX risk to its suppliers—many of whom will charge a premium for assuming the risk, and/or may fail to manage the risk appropriately.

In addition to the financial risks, insisting on transacting in U.S. dollars may pose a commercial risk. Take international franchisors as an example. In a competitive market for quality franchisees abroad, invoicing in U.S. dollars will burden operators who do business in their local currency by forcing them to pay for an FX conversion before they can pay royalties. The result is an increase in the cost of franchising, which could serve as a disincentive to choose that particular franchise.

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