You agreed on the price weeks ago. The exchange rate didn’t care.
Your client pays you a fixed Dollar amount. Your overseas supplier is paid in their local currency. You signed off on both sides weeks ago but don’t pay the supplier until later, when the rate may have moved. Your revenue held still but your cost did not.
You’ve quoted a fixed price job in US Dollars, and that number is now locked from your side. But some of the work calls for specialist materials from a supplier in Italy who invoices you in Euros. When you priced the job, you worked it out at the current exchange rate, and it looked fine. The catch is that you won’t actually send the cash to Italy for another eight weeks, and exchange rate movement could cost you money.
Where does that money leak occur?
In the gap between agreeing to the cost and paying it. Your revenue was fixed in Dollars the moment the client signed. Your cost, however, is still floating, because there’s a Euro cost hidden inside your US Dollar estimate. During those eight weeks, the Euro can shift up or down against the Dollar. If it goes up, those same Euros cost you more than you’ve allowed for. Nobody sends you a bill for the difference. It just quietly leaks out of your profit margin.
Why didn‘t I notice?
Because nothing in your paperwork changed. Your supplier’s invoice had the same Euro amount you agreed on. Your job was still the same Dollar price. The only change was the rate connecting the two when you paid the bill. And that change does not show up on any document you signed, it’s on your bank statement and often nowhere else. You feel it right at the end, when the job generates less profit than initially promised.
Is a longer gap worse?
Longer gaps give the exchange rate more time to move, so yes. The more time between agreement and payment allows more time for the rate to fluctuate. This is simply because there’s opportunity for economic and political winds to change (known as exposure), causing the number to drift.
Is this the same as the hidden margin?
No, it’s a separate liability, that could be positive or negative as a line item on your balance sheet. The margin is the fee added by your processor for providing the service. Timing exposure is the market rate moving between now and when the payment comes due. Both can sting you on a single payment.