For high-growth technology businesses, especially those that are reselling products from overseas manufacturers, protecting profit margins is vital to succeeding in competitive markets. The same can be said for online and brick-and-mortar distributors and retailers across many sectors.
After a successful startup year in business, the entrepreneurs behind US-based Quantum Microwave discovered that paying international suppliers through traditional bank transfers was prohibitive to the growth and profitability prospects of the company they worked so hard to hard to get off the ground.
That's when they called on XE's business services team.
About Quantum Microwave
Andy Cobin and his wife founded Quantum Microwave in 2016 to supply high-tech components for quantum computers and radio astronomy. Realizing the significant growth potential of the market, and identifying a supplier of an extremely high-quality product in Sweden, Andy decided to leave the world of employment to set up his own business. Their business supplies two products. One set of products is manufactured by Quantum in Massachusetts, and the other product line, which generates the majority of their revenue, is imported from Sweden.
A Growing Business with International Market Reach
While Quantum Microwave is still a young and relatively small business, it had a vital international component from day one, with its primary product being manufactured in Sweden. Selling a product in US dollars and having to pay for it in Swedish Krona is challenging for any business, but especially so for a small startup. The nature of the industry means that products need to be quoted, and price guarantees need to be given to customers, well in advance of any purchasing decision being made.
In the first year, this had a significant negative impact on profits. On several occasions, a price guarantee was given, and by the time the customer ordered the products, the exchange rate between the US dollar and the Swedish Krona had changed, resulting in Quantum Microwave losing most of their profit margin. This was made worse by the fact that international money transfers were also expensive and time-consuming.
Realizing the significant impact this would have on the success of the business, Andy went looking for a better way to manage international money transfers.
"During our first year of operation, we weren't very good at forecasting and
protecting our profit ahead of time. There was significant movement in the US dollar, and that eradicated our profit margins." - Andy Cobin, Founder and President, Quantum Microwave
Managing Foreign Exchange Risk
While looking for a better way online, Andy came across XE. Impressed with what he saw, he reached out, and XE presented him with a compelling solution. In the early days of working with XE, Quantum Microwave used spot contracts to transfer currencies at very competitive rates immediately. However, the business was growing fast and more than doubled its annual revenue in the second year. With most of this growth coming from sales of the Swedish product, the transaction value and frequency went up quickly.
XE approached Andy and walked him through the value of forward contracts based on his company's transactional risk. Forward contracts allow Quantum Microwave to buy foreign currency now when the exchange rate is favourable and to trade at a later date. This enables the business to guarantee a price to their customers without having to worry about jeopardizing their profits, should the exchange rate fluctuate unfavourably in the time between the quote being issued and the order being placed.
Quantum Microwave’s standard profit margin for the product they import from Sweden is 15%. In Andy’s experience, fluctuating exchange rates can impact this margin by 2% in either direction, giving him a margin range of 13-17%. With several million dollars’ worth of transactions to Sweden each year, this 4% range ads up to over $120,000, which is significant margins for a small, fast-growing business.
Andy is fully embracing the benefits XE offers his business. He tends to check exchange rates several times a day via the XE Currency app and online platform. With this strategy, foreign exchange rates are no longer a burden on the business but an opportunity to maximize profits.
"If I turn on the computer and I see that the dollar has gone up all the sudden, I
buy as much as I can. The flexibility of forwards really helps me to protect my
Trustworthy, Professional and Easy
Andy enjoys working with XE. Not only because of the positive impact it has on his profits, but also because he likes having a trustworthy, established business partner that is easy to work with alongside him. Andy prefers to do his transactions over the phone. He uses the online platform to check exchange rates and likes that he can see all his transactions, due dates, and balance at a glance. However, when he wants to make a transaction, he enjoys the ability to pick up the phone and call Mike Diaz, his dedicated XE contact, who executes his transactions in a few minutes.
"Having a dedicated dealer is great. I just call Mike, and he takes care of
everything. He's excellent!"
Leveraging Opportunities in a Growing Market
With the quantum computer industry growing exponentially at the moment, Andy Cobin is looking positively into the future. He is confident that they have the products, people, processes, and foreign exchange partner to fully leverage this opportunity, and run a successful business for many years to come.