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How to avoid exchange rate loss?
Thread poster: Wendy Cummings

Wendy Cummings  Identity Verified
United Kingdom
Local time: 21:32
Member (2006)
Spanish to English
+ ...
Jul 12, 2010

I have agreed rates in sterling with my UK clients, and in Euro with my Euro-zone clients (and in the local currency of the few clients located outside this area).

I am obliged to record the sterling equivalent of each euro invoice as at the date of the invoice, and I use this as my turnover. However, when the invoice gets paid (which as we all know can take 60+ days), the actual sterling amount I receive is invariably different (and with the current struggling pound, usually less) than the amount I invoiced.

I therefore record an exchange rate loss each time, and this can add up to hundreds of pounds over the year.

The only possible way I can think of overcoming this, is always charge in sterling and force my clients to ask their bank to pay me that amount in sterling, regardless of the euro amount for them. However, I don't think they would be particularly pleased with that solution, as it would mean they could not predict exactly how much they would be paying me each time.

Has anyone else encountered this and found a viable solution?


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Sonia Hill
United Kingdom
Local time: 21:32
Italian to English
I may be doing it wrong... Jul 12, 2010

... however, I have always recorded the actual payment amount in pounds and not the amount according to the exchange rate on the day of the invoice. I thought my accountant said this was ok, but you have me doubting this now. I will double check it with him.

My bank doesn't charge me anything for payments made in euros, but if a foreign bank pays me in pounds I get charged £7 each time, so unless it was for a large amount that option wouldn't really work for me.


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Marijke Singer  Identity Verified
United Kingdom
Local time: 21:32
Dutch to English
+ ...
At a loss Jul 12, 2010

If you are charging in euros, you should be making a profit on the exchange rate when you get paid to your UK bank account in sterling every time the euro gets stronger. The last few months the euro has dropped from 90 pennies to 84 (today) but if we compare it to 2 or 3 years ago it is still strong. I have more or less stopped working for UK agencies because what I get from my euro-based customers equates to 80 or 100 pounds per 1000 and UK agencies are not prepared to pay that. This may, though, be because I translate from Dutch, which attracts a higher rate than Spanish or Russian.

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Ronald van der Linden  Identity Verified
Mexico
Local time: 15:32
German to Dutch
+ ...
exchange rate loss is a business cost = deductable Jul 12, 2010

I'm not really sure how tax regulations are in your country.
But, financially speaking if you invoice X pounds equivalent in Euros, and declare this as your income, then you should also declare the actual payment equivalent in pounds.

An example:
You invoice 100 pounds (in euros) to a client in the Netherlands. VAT 0% generally speaking, but due to exchange rate differences and bank costs, you receive 90 pounds.

Strictly speaking:
In your administration you would then need to separate the bank costs (lets say 5 pounds) and exchange rate costs (another 5 pounds). Both are financially speaking actual costs of your company, however, fiscally it would depend whether you are able to fully deduct these costs and if so, how and where to present them. Exchange rate losses could be directly deducted from your revenue.

Perhaps in your fiscal system, it would depend on your company's size whether or not you'd need to keep an administration with this level of detail. Perhaps, a smaller enterprise is allowed to maintain a much less detailed level, such as Sonia's mentioned.


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RobinB  Identity Verified
Germany
Local time: 22:32
German to English
Accrual vs. cash-based accounting Jul 12, 2010

Wendy,

The way you describe it, you're using accrual accounting, as you appear to be booking the transaction (and translating the euro amount) when the invoice is issued, not when it's paid. I think most translators will be using cash-based accounting, under which the amount and exchange rate are recorded in the books on the date cash is received (or an entirely different, e.g. composite, exchange rate is applied, for example under tax rules).

If you are indeed using accrual accounting, you should also be able to establish what is essentially an allowance account for exchange rate losses (and gains!) between the invoice date and the date of receipt of payment. This is standard accounting practice for most corporations, as these invariably use accrual accounting, with exchange rate losses included in other operating expenses and exchange rate gains included in other operating income in P&L.

(Of course you also have a contra account if you buy goods or services in other currencies, but I suppose that's not very likely in your case).

My urgent suggestion is to discuss this with an experienced accountant, as I suspect you may either be applying accrual accounting rules when you're a cash-based accountant, or not making full use of all the accrual accounting options if you are, in fact, correctly using accrual accounting.

HTH,
Robin


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Mohamed Mehenoun  Identity Verified
Algeria
Local time: 21:32
Member (2008)
English to French
+ ...
Create an account in EUR Jul 12, 2010

Wendy Leech wrote:

I have agreed rates in sterling with my UK clients, and in Euro with my Euro-zone clients (and in the local currency of the few clients located outside this area).

I am obliged to record the sterling equivalent of each euro invoice as at the date of the invoice, and I use this as my turnover. However, when the invoice gets paid (which as we all know can take 60+ days), the actual sterling amount I receive is invariably different (and with the current struggling pound, usually less) than the amount I invoiced.

I therefore record an exchange rate loss each time, and this can add up to hundreds of pounds over the year.

The only possible way I can think of overcoming this, is always charge in sterling and force my clients to ask their bank to pay me that amount in sterling, regardless of the euro amount for them. However, I don't think they would be particularly pleased with that solution, as it would mean they could not predict exactly how much they would be paying me each time.

Has anyone else encountered this and found a viable solution?



Hello,

I don't know about the situation over there but it would be wiser to create an account in EUR in UK and the problem will be solved as long as you fix your rate in EUR.

Or else you can create an account in Spain, France, Switzerland...Whichever suits you best...


Anyways if your money is in EUR ; you can choose when to convert i.e. when you earn more than what you loose...

I hope it helps.

Moh


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Attila Piróth  Identity Verified
France
Local time: 22:32
Member
English to Hungarian
+ ...
Currency Risk Mitigation Jul 12, 2010

Katalin Horvath McClure analyzed this question in detail in her article, Currency Risk Mitigation 101 for Translators.

Best regards,
Attila


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Peter Linton  Identity Verified
Local time: 21:32
Member (2002)
Swedish to English
+ ...
Accruals it is Jul 12, 2010

Wendy Leech wrote:
I am obliged to record the sterling equivalent of each euro invoice as at the date of the invoice, and I use this as my turnover.

You are unfortunately right - profits should be calculated on the invoice amount not the actual cash receipt. An official HMRC document for self-employed states:

Profits which arise from carrying on trades, professions and vocations cannot usually be worked out by simply adding together the cash receipts of the business and deducting expenses paid out. This would show the business’ cash flow, but it would not usually be a proper measure of
its profits.
To arrive at the profits it is necessary to draw up accounts using the methods which accountants have developed for dealing with income that has been earned but not received, expenses which have been incurred but not paid or paid but not fully used, and so on.

In other words, as RobinB says, Accrual vs. cash-based accounting.
A couple of years ago I went to a talk by an HMRC official, and he said the same thing.

But I suspect that the majority of UK translators actually use cash-based accounting, because that solves all the foreign exchange problems you mention, and the difference between accruals and cash-based is likely to be minor and not sufficient to trigger a tax inspector's curiosity.

As for the exchange rate, as I understand it is okay to use the official exchange rates published by HMRC on their website. This gives a figure for each month. So at the end of the tax year I download these rates and convert my foreign currency income by each monthly rate. But I also have a Euro account at my British bank which makes payment quick and easy and cheap for my Euro zone customers. From time to time I transfer Euros to my sterling account and get a favourable rate of exchange. Is also means that before travelling abroad I can take out a large wad of euros at my local bank. Safer these days than paying by credit card abroad.


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Wendy Cummings  Identity Verified
United Kingdom
Local time: 21:32
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
Euro accounts Jul 13, 2010

Whilst having a Euro account would allow me to mitigate the problem slightly, in fact the large majority of my income is in Euros, and so I wouldn't be able to leave it in the account until I needed it - i need it every month as my salary.

Don't get me wrong - I certainly do take this loss off my taxable profit, but I would just rather avoid it in the first place!


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Kate Chaffer
Italy
Local time: 22:32
Italian to English
Pro forma invoice Jul 13, 2010

Why not issue a pro forma invoice to your clients, then issue the actual invoice on the date of payment? That way you can record the actual amount received.

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Tom in London
United Kingdom
Local time: 21:32
Member (2008)
Italian to English
Unavoidable Jul 13, 2010

Wendy Leech wrote:
I would just rather avoid it in the first place!


Alas, Wendy, trading one currency against another is a powerful activity. Not only did the markets not want the UK to be in the Euro (hence Black Wednesday all those years ago); they would also like the Euro itself to collapse so that they can have more currencies in which to speculate.

Buy £1m Euro at today's rate, then sell them when the exchange rate drops. Even if the difference is 0.01% you've made a lot of money. I think that's basically how it works. My next-door neighbour calls himself a "currency trader". This is what he does. I'd use a different word to describe what he does.

The UK is now more or less permanently out of the Eurozone, and anyone (such as you or me) whose main source of income is Euroland will simply have to take it in the teeth. And let's not forget that in the "good times" depending on how the Euro and GBP fluctuate against each other, we in the UK sometimes have the advantage.

The only way to avoid exchange rates between currencies, and their fluctuations, is to always stay in one currency; which is of course impossible if, like you or me, you need the cash!

[Edited at 2010-07-13 08:28 GMT]


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Tom in London
United Kingdom
Local time: 21:32
Member (2008)
Italian to English
Invoice payments Jul 13, 2010

Kate Chaffer wrote:

Why not issue a pro forma invoice to your clients, then issue the actual invoice on the date of payment? That way you can record the actual amount received.


I don't know if all UK banks do this, but for each transfer received in Euro my bank (Natwest) always sends me a letter that clearly sets out (a) the amount in Euro that was sent (b) their exchange rate applied on the day (c) their transaction charge -£1 if it's less than £100, £7 if it's more than £100 - (d) the amount actually credited to my account.

These letters are really useful. I simply clip them to the invoice to which they refer. Don't all banks do this?


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Vicky Nash  Identity Verified
United Kingdom
Local time: 21:32
Member (2008)
English
@ Tom Jul 13, 2010

I too get such letters from Santander when I receive money in a foreign currency - I had always assumed it was a requirement that they sent them (used to bank with Natwest, so was aware of the practice with them). Perhaps not, but as you say, they are invaluable for doing my accounts.

Vicky


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Wendy Cummings  Identity Verified
United Kingdom
Local time: 21:32
Member (2006)
Spanish to English
+ ...
TOPIC STARTER
@Tom and Vicky Jul 13, 2010

My bank (HSBC) does this too. At first they tried phoning me each time I received a foreign transfer, but I quickly told them not to bother, as they'd be calling me several times a week!

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Sonia Hill
United Kingdom
Local time: 21:32
Italian to English
My bank does this too Jul 13, 2010

Tom in London wrote:
I don't know if all UK banks do this, but for each transfer received in Euro my bank (Natwest) always sends me a letter that clearly sets out (a) the amount in Euro that was sent (b) their exchange rate applied on the day (c) their transaction charge -£1 if it's less than £100, £7 if it's more than £100 - (d) the amount actually credited to my account.

These letters are really useful. I simply clip them to the invoice to which they refer. Don't all banks do this?


First Direct does this too (no charge at all for payments in euros BTW). This is what I use to calculate my turnover.
However, I thought Wendy's question was a different one, i.e. whether we should be calculating our turnover according to the exchange rate on the invoice date (which is what Wendy does and in which case a lot of money really would be lost at the moment) and not on the actual payment date (which is what I do).


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