Great news. You will be managing a large project that transcends international boundaries, multiple time zones and multiple sub-contractors. As a result you’re having to think about how to deal with multiple currencies. This can be a project accounting nightmare if it is not thought out in advance.
Mulitple currencies can be a blind spot for project managers who have only worked in one country with one type of money and never had to deal with international contractors or clients. But the world is a lot smaller than it used to be and outsourcing outside your own country or finding a client in another country can bring in complex financial questions that have the potential to generate risk that you might not have given sufficient thought to. Let’s take a look at a few concepts you’ll need to think about:
Pick a base currency
This might not be as obvious as you think though it’s often a common starting point. “Just make everyone work in US dollars,” someone might say (even if they are not in the US. The key to picking a currency for your project accounting isn’t just what’s familiar. In what currency will most of the transactions occur? How stable is the currency you’re selecting? What risk are you absorbing by selecting the currency you favor?
How to determine conversion rates
Ever gone on vacation, convered your own money into the local currency and then converted it back when you left? Didn’t come out the same did it? There is always a gap between the selling price and the buying price. Moreover, you are very unlikely to get the same rate as the banks get. What should be a reasonable exchange rate for purchases? What should be the rate for sales? Will you have to bring money in from one currency then exchange it and then exchange it again sending it back? Sound confusing? Imagine you have a foreign client. They give you an amount of money in advance for services. You hire some workers in that country to do the work. You will sell the foreign currency to get it into your bank and lose some percentage on bringing it in. Then you’ll need to go buy that currency later to pay your workers and again lose some percentage sending the money out.
When do we convert the currency?
Imagine the foreign client sends you $100,000 worth of their currency as a deposit on your project. But, by the time you convert the money into your base currency, the exchange rates have changed and now it’s only worth $95,000 or, by the time the expenses arrive that this money was allocated for, their invoices add up to $105,000 when converted to your base currency.
You could convert when the foreign currency arrives.
You could convert it when you think the rates are favorable
You could convert when you use it for expenses
Which is the right answer? All of the above.
Have the Client or Subcontractor absorb the currency risk
You’ve avoided all these challenges by getting the client to agree that they pay you in your base currency and you’ve insisted to your subcontractors that you only ever be invoiced in your base currency. Problem solved, right? Sorry, no.
Now you’ve displaced the risk from you to your client for money you expected. The client lives in their own currency. There now exists the possibility that when the final invoice comes due, the client says they can’t afford it because the exchange is too great. Same problem can occur with the sub-contractors. In mid-project the subcontractor informs you they can no longer continue because their profits eroded due to currency fluctuations that they are absorbing all of the risk of and you are now stuck with a project half-done.
Solving the Multi-Currency Challenge
So, is the lesson here not to take on any contracts with either foreign clients or foreing sub-contractors? No, of course not. At my own firm, HMS we do almost 80% of our business outside of our headquarters and multi-currency management is a fact of life. Here are a few lessons we’ve learned over the years about managing the challenge of multi-currency project management
Pick a base currency
While our headquarters is based in Canada, we often use US Dollars everywhere else as a base currency. It is widely accepted in many countries as a currency where the fluctuations are known and dealt with in every day life. We also however, set some rates in Euroes and some in British Pound Sterling.
Identify costs in each base rate
While you might use a base currency for your accounting. Keep track of the invoices or receipts you’ve had in the currency they started in. That will always allow you to apply the conversion rules you’ve decided on to the original source amounts.
Pick a base rate
Start with a base exchange rate and speak about that rate with your clients and contractors. If the projects are very short term (as almost all of HMS’s are), the fluctuating exchange is rarely an issue. For longer term projects, articulate the multi-currency challenge with the parties involved.
Articulate this challenge into your contracts
Don’t forget to get your manage currency plan into your contract with your client and sub-contractors along with mitigation clauses for what happens if the currency fluctuates outside an acceptable threshold.
Monitor and set thresholds
Make sure you are monitoring the fluctuating rates and set thresholds before you start so you can raise a flag for you to re-assess and for you to renegotiate if requried with your clients and contractors.
I expect that managing multiple currencies within project accounting will become more and more common in the years as the world becomes an ever smaller place and communications makes it easier and easier to seek clients and contractors in other countries.
If you’d like to see how TimeControl handles multi-currency challenges, take a look at the blog post on blog.timecontrol.com at: blog.timecontrol.com/?p=162.