Contractors' Questions: Can I get my fee from a US client in pounds?
Contractor’s Question: My expanding London-based IT consultancy company is about to dip its toe into the American market, as I will soon have a client as well as a supplier in the USA. But as I will need to keep using a supplier in the UK, how would I account for the foreign exchange when making transactions with my partners?
Expert’s Answer: I can see three dollar exchange rates that your business will be impacted by, assuming all partners you refer to are transacted with.
Firstly, let’s take your newly found American partners. When you make a sale or receive an invoice from them, you will record that transaction in sterling based on the foreign exchange rate at the time. This represents the amount you expect to receive or pay.
Because the exchange will have changed by the time you collect any debts (from the US client) or pay any amounts (to the US supplier), you will end up with a different value of sterling on the receipt or payment. So compared with the figure in pounds that you initially recorded, you will emerge with a loss or a gain, depending on which way the exchange rate moves.
Thirdly, in terms of the relevant exchange rates for your business, is one that relates to any balances outstanding at your company’s year-end. You should re-convert all foreign currency amounts at the year-end rate which, again, will leave you with a loss or a gain. Which one you’ll end up with – hopefully the latter – is dependent on the number of transactions you have in foreign currencies and the fluctuations in exchange rates.
To make things lighter from an administrative point of view, set an average exchange rate for your business each month. This would save you from having to find out the latest rate on the day you need to know it, although some accounting software systems do link to live rates.
Lastly, if you are going to have significant transactions, a US dollar bank account may be best, as this would reduce both bank transaction fees and your exposure to exchange losses.
The expert was Jon Dawson, partner at Kingston Smith LLP.