“Think Global & Act Local” has gained popularity due to the nature of businesses in today’s world. Globalization has reached its tentacles into all nooks and corners of the world without one even realizing it. In this highly intertwined environment a business organization has to deal with several legal items such as export import controls, license, duty and taxes, bank guarantees, customs clearing, currency rates etc.
Fluctuating currency rates can make or break a business transaction due to its impact among relationship between two currencies. For example, an Importer from India (INR) has negotiated to buy widget from USA (USD) for 100 dollars. While signing the agreement, the exchange rate was INR 50 to USD 1. If the conversion rate jumps to INR 60, it puts an additional burden of INR 1000 on the importer for each widget in terms of additional expenses. A reverse scenario where currency exchange rate falls to INR 40 will impact an exporter from India, wherein the exporter will fall short estimated revenue. Large organizations have exclusive teams within Finance department to handle such currency fluctuation risks by dealing in multiple currencies and hedging.
All transactions are recorded in the respective OLTP systems with all required currencies. Essentially the value of every transaction will be stored in actual transaction currency and other currencies as required. In a simple scenario, an organization can maintain multiple currencies such as INR, USD, SGD, EUR etc., for a each transaction after currency conversion. This method will work if a small set of currencies are to be managed. Large organizations cannot maintain innumerable currencies and hence keep only transaction currency at the transaction level, may be one or two additional currencies. A separate master data is created that stores various exchange rates based on time period(s). This currency master data is updated regularly with correct exchange rates and validity period.
Reports will utilize the exchange rates maintained in order to convert data from transactional currency to any target currency as per users wish.
(To be continued in Part #2)