International expenses management: what could go wrong?

Changes in the global business landscape are bringing fresh challenges for HR and finance managers. Nat Davison, partner at specialist money exchange broker Frontierpay, shares his tips.

International expenses finance
Imagine that you, as your company’s HR manager, have received a call from Nick, a member of your team, who has just arrived in Chile. Nick has been sent from the UK on a two-year assignment, and has arrived at his new home with his family in tow.His new job is lined up, the kids are enrolled at the local school, and they have a beautiful house to live in during their time overseas.However, Nick is calling because things haven’t gone according to plan. Upon arrival, he’s found that he can’t enter his house because the deposit and the first month’s rent haven’t been paid. Come Monday morning, he’ll find that the kids’ school fees haven’t been paid either.You start to wonder what could have gone wrong. Has the payment been delayed, or maybe even rejected, by the bank? Has an unexpected change in the exchange rate meant that the funds sent aren’t sufficient to cover the expense?Either could be entirely possible, and, with global mobility on the rise, situations such as this could increase as well.The world is constantly becoming more connected, and countries are emerging for the first time as players on the international business stage. This is, of course, hugely positive from the perspective of business growth and the increased potential for a company to become a global player.However, this change in the business landscape is also creating a host of new challenges for HR and finance managers, who have not only to complete payroll but also to pay employee expenses across numerous different countries and in a range of different currencies.

Can we ‘expense’ that?

It’s important to clarify what, exactly, we mean by international expenses before considering where complications can arise. Much like those for staff based in a company’s home country, international expenses are separate from wages and are to cover costs that employees have incurred through their work.Where expenses for international employees most commonly differ is that, while we might expect local staff to ‘expense’ a train journey or a client lunch, an employee who is moving overseas will need assistance with paying the more significant costs, such as renting a new home and paying for utilities.These payments are often made by the business direct to a landlord or utilities provider, rather than by reimbursing the employee.It’s therefore easy to see how complications can arise. Not only do HR and financial managers have to pay larger, more important expenses, they also have to keep up to date with changing local payment requirements and the ever-present fact that we can’t predict which way the exchange rate will move.Let’s take a look at where, exactly, the process has scope to cause problems.

Currency fluctuations

It’s no secret that the value of currency is constantly in flux. After all, this is something that businesses with international dealings have to monitor on a daily basis.However, those with staff overseas will know it’s not only sales which can be affected by the exchange rate. For each employee going on an international assignment, the business’s mobility team will put together a cost projection based on the current exchange rate.Let’s say an employee is moving to France for two years and the exchange rate, today, stands at €1.18. The company will project that to pay the employee an annual wage of €50,000 for the two years that they are abroad will cost a total of £84,000.However, a large, unexpected shift in the exchange rate, such as that which we have recently seen in the wake of the Brexit vote, can disrupt these plans in a big way.It’s true that this is a two-way street, as exchange rates can rise just as easily as they can fall. However, businesses can adopt a hedging strategy, rather than playing a dangerous game of ‘chicken’ with the exchange rate.In brief, hedging involves purchasing in advance some, or all, of the currency you will need over an extended period, at the current exchange rate, avoiding future risk of that currency dropping in value and becoming more expensive to buy later on. Using this approach, businesses can make cost projections that are far more accurate and eliminate a significant amount of risk.

Splitting expenses and wages

It’s not unheard of for companies to operate a ‘split payroll’ for employees who are on an overseas assignment. This will ultimately be decided as a case of personal preference, but will often be influenced by the arrangements that the employee has made with their employer to cover their expenses.For example, if an employee’s rent and utilities are covered as an expense, their living costs are significantly reduced, and so they might ask for a portion of their wages to be paid to a separate account in their native currency. This may be used to cover ongoing expenses back at home, such as mortgage payments or supporting family members who have stayed behind.Alternatively, an employee might split their wages into separate currencies if the assignment takes them to a country where the local currency is not considered to be particularly stable. Someone who has moved from the UK to spend a year in Ivory Coast, for example, might ask for part of their wages to be paid in pounds, to minimise exposure to the volatility of the local currency.It’s important to remember that facilitating a split payroll in order to meet these requests does require double the amount of diligence to ensure that payments will reach their destination in full and on time. Furthermore, the company needs to ensure that the necessary tax is paid compliantly to the local authority in both countries.

Navigating compliance controls

The maturity of the banking system varies from country to country, and this, along with other factors, can affect settlement times. It will be simpler for a company in the UK to pay an employee if they are based in Europe than in Algeria, for example. However, one of the leading causes of payments being delayed is the impact of ever-expanding compliance controls. For example, cross-border payments are often routed through intermediary banks before reaching their destination, adding yet another layer of compliance for each payment, which can lead to delays.Such delays can pose problems, as more often than not, expenses are time-sensitive. Our friend Nick, who can’t enter his house in Chile, is a prime example of what can go wrong when payments are held up.Using the local payment infrastructure in country removes the need for an intermediary and is a far more reliable way of ensuring that payments won’t be held up. There’s also an added bonus, in that such payments are likely to be far more cost effective. Techniques such as the ‘penny test’, whereby a nominal amount of currency is transferred to a new beneficiary by way of a dummy run, can help ensure that there will be no complications when it comes to sending important payments.

Research is key

There can be no question that international expenses management is a complex area, with an acute impact on people’s daily lives. There’s no shortage of workers moving overseas, as was shown by JP Morgan’s recent announcement that it planned to move hundreds of jobs out of the UK, and HR managers need to be prepared. My advice is to research a country’s financial infrastructure and regulations thoroughly in advance of your employee relocating to the area. Where possible, attempt to use the local payments network for disbursements, employ hedging strategies to minimise the risks of volatile exchange rates, and don’t be afraid to consult a specialist where necessary.For more information, visit Frontierpay
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