The once-in-a-generation spike in inflation we’re all experiencing continues to be an ongoing concern around the globe. For businesses in Australia, a knock-on effect has been a strengthening of the US dollar against the Australian dollar, worsening the effects of inflation for retail companies who may be buying in USD and selling in AUD.
The US dollar—the most important currency for the global economy—is the strongest it has been in a generation. US dollars represent nearly 90% of all foreign exchange transactions, ranging from purchases by individuals to the business of multinational corporations. As a traditional safe haven currency in times of economic uncertainty, the strength of the US dollar in the current inflationary environment is putting downward pressure on many global currencies, including the Australian dollar.
Already this year, the Australian dollar has experienced a great deal of volatility against the greenback. From a high of 76.6 cents US in April to a low of 66.1 cents US in July, and despite some recent strengthening, the Australian dollar is down nearly 5 cents against the US dollar year to date.
This fluctuating value against the US dollar makes planning difficult for businesses and exacerbates the impact of inflation on the bottom line.
The most significant effect of inflation experienced by retailers relates to input costs: the rising price of the goods and materials that companies must buy to keep their shelves (or delivery hubs) stocked. Each of these input purchases made by an enterprise is governed by a contract, and the good news is that effectively managed contracts can help protect Australian retailers hurt by worsening exchange rates.
To begin with, many contracts contain clauses dictating what currency purchases are made with. The very first thing Australian retailers should do is determine which of their supplier contracts contain these clauses, and document what they say. This exercise can uncover situations where the contract entitles them to buy products in AUD instead of USD—a favorable adjustment given the above dynamics. This exercise can also surface contracts where the currency is not defined—in these cases, retailers have room to negotiate with their suppliers to ensure they are getting a fair deal.
These contracting insights are similar to those already conducted worldwide to address inflation in general; Icertis has worked with customers to analyse hundreds of thousands of contracts to determine which agreements include price adjustment clauses so they can be better prepared to keep up with surging prices.
Of course, in order to leverage contracts in this way, three conditions must be in place.
- First, retailers need to know where their contracts are: you can’t analyse contracts that are sitting in a category manager’s email or computer desktop.
- Second, those contracts must be digitised in a way that provides clause-level insights into the contracts. The system will need to be able to recognise what a currency exchange clause looks like, and what it says.
- Lastly, you’ll need a way to operationalise your contract insights—for example, tying the currency language into your finance system to ensure what’s happening on the ground aligns with what was agreed to in your contracts.
These three conditions apply to contracts already in place, but with the right system, retailers can also take steps to ensure future contracts they enter into have better currency exchange terms. While each company’s strategy may vary based on their specific needs, the right contract management system can help them ensure that strategy is implemented when the time comes to enter new contracts or renegotiate existing ones.
At Icertis, we call this “Contract Intelligence” – the ability to ensure the intent of every contract is correctly memorialised and fully realised. As retailers are expected to respond to rapidly changing market conditions, economic climates, and customer expectations, contract intelligence is becoming a must-have.
Australian companies have the potential to overcome the knock-on effects of a strengthening US dollar worsening the effects of inflation. While the Australian dollar has experienced some recent gains against the US currency, it’s still important to leverage existing contract terms through effective contract management. And advanced contract management systems that use contract intelligence can help Australian businesses to ensure resilience in the face of current challenges and protect themselves from the negative effects that inflation brings.
Monish Darda is co-founder and chief technology officer at Icertis.