Competition is global and it’s very common to have in your peer group a company that uses a different currency to the one you use internally. To standardize your reports and actually make it possible to work with figures across currencies, we need to convert them to a base currency.
Imagine you compete with an international competitor from the Czech Republic and your reporting is in EUR.
| Year | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|
| Revenue [CZK] | 100 | 100 | 100 | 100 |
| EUR/CZK | 27,02 | 25,53 | 25,98 | 25,30 |
| Revenue [EUR, Historical rate] | 3,70 | 3,92 | 3,85 | 3,95 |
| Revenue [EUR, Current 2020 rate] | 3,95 | 3,95 | 3,95 | 3,95 |
Questions
- How do you interpret the company’s revenue in 2018 vs 2017?
- Will you use the historical exchange rate or the current exchange rate?
- Did the company perform better in 2018 compared to 2017?
Current Practice
The “Easy” Solution
One easy way how to manage currencies is to conver all the figures you encounter using your company currency. But as you can see above, that will become problematic in long run because you discard the underlying context.
If you use the “easy” solution, you also make it hard to understand the context of whatever figures you may come across in the future. Consequently, this easy solution will force you to do an inverse conversion in the future and make it unpleasant and unreliable to work with figures when their exchange rates change.
The “Proper” Solution
The solution is to save the figures in the original currency. But that opens up the whole problem area of what currency rate(s) you will apply. You have basically two options:
Use current (e.g. today’s) exchange rate
Use historical exchange rates
Option 1: Current exchange rate in Market Intelligence
Current exchange rate is a fixed rate, most probably today’s rate, you use to multiply all figures with. Sometimes you may opt in for more complex approaches, such as a period average.
- Upside: A big benefit of this method is its relative simplicity. There is one figure you use. Beyond that, it may be also applicable to your case if a company is not influenced by international business. But it’s quite rare you will encounter this case.
- Downside: You will have to keep track of the one currency you have used anyway. It will probably be scattered across many Excel and PowerPoint documents. But a bigger problem is what happens if you use one rate. As most companies benefit from foreign trade and their economic performance reflect it, you should take into account the currency exchange at the time as well. You’d otherwise remove a part of their performance and take wrong conclusions. Last but not last, current rates change significantly (for example AUD has strengthened by 35 % to USD since 2001), and thus using 2021 rate on interpret 2001 figures will result in 35 % different results if we simplify it a lot.
Option 2: Historical exchange rates in Market Intelligence
Historical exchange rates refer to the exchange rates at the time of reporting. For example, you could take P&L values from 2010 and convert them using the exchange rate on 31 December 2010.
- Upside: The upside of using the historical rates is that you save the context and are able to interpret your data better in most cases. It may be critical to interpreting the business if the company is involved in import/export activities.
- Downside: It’s harder to manage. A company with limited local operations may not be suitable for the method (this is rare though).
The bottom line: In 99% you would want to use historical exchange rates to keep the context intact. Midesk makes handels historical currency exchange for you automatically.
Data Repository Export In Currency
Report Builder and Currencies
Midesk’s Report Builder is not only able to automatically keep you graphs up to date with it’s rolling periods but also able to automatically convert your graphs to a specific currency.
The same applies to variables. You can specify which currency you want your self-updating figures to convert into.