FX Variance Analysis for UK Startups: Practical Guide to Tracking Currency Impact

Understanding FX Variance for UK Startups

Receiving your first significant payment from a US customer is a milestone, but when the money lands a month later, it can be hundreds or even thousands of pounds short. This is not a payment error; it is currency volatility in action. For UK startups in SaaS, deeptech, or e-commerce, sudden exchange rate swings can erase expected profits and create serious cash flow gaps. This guide provides a pragmatic framework for how to track foreign exchange gains and losses for startups, helping you protect your runway and make better financial decisions. For a broader look at reviewing actual vs. forecast results, see the Variance Analysis topic.

Foundational Concepts of FX Gains and Losses

Before diving into the process, it is important to clarify the core concepts. Foreign Exchange (FX) variance is the difference between the GBP value of a transaction on the day it is recorded, such as an invoice date, and its value on the day it is settled, the payment date.

This variance results in either a realised or unrealised gain or loss.

A realised gain or loss is the actual profit or loss in GBP that occurs when a foreign currency transaction is completed. For example, when a US customer pays their dollar-denominated invoice and you convert the funds to sterling, the difference between the invoice value and the settled value is locked in. It’s a real impact on your cash.

An unrealised gain or loss is an on-paper adjustment required for accurate financial reporting. If you have an outstanding USD invoice at the end of a reporting period, you must revalue it based on the exchange rate on that closing date. This gain or loss has not actually hit your bank account yet. This is not just an accounting entry; for UK startups, the accounting standard FRS 102 requires FX variances to be tracked for audit and tax purposes. Understanding this distinction is the first step in separating operational performance from market noise.

How to Track Foreign Exchange Gains and Losses Accurately

How can you see the difference between your business performance and currency market swings? The key is a consistent process for handling multi-currency transactions. Without a methodical approach, founders often struggle to isolate FX impact from operating performance, leading to misleading margin numbers.

The process begins in your accounting software. For UK-based startups, this is typically Xero, which has robust multi-currency capabilities. The foundational principle is to use two different dates for measurement: the invoice date and the payment date.

1. Record Revenue at the Invoice Date Rate: When you issue a $10,000 invoice, you record it in your accounting system at the GBP equivalent for that specific day. This figure represents your true operational revenue, untainted by later currency fluctuations.
2. Record Cash at the Payment Date Rate: When the customer pays, the actual GBP amount that hits your bank account will be based on the exchange rate on the day of settlement. This reflects your cash reality.
3. Calculate the Variance: Your accounting system will automatically calculate the difference between these two GBP values and post it to an “FX Gains & Losses” account in your Profit and Loss statement.

For example, a $10,000 invoice valued at £8,000 on the invoice date is settled a month later at a value of £7,750. This creates a £250 variance. This £250 is a realised loss that directly impacts your profit. It’s a real impact on your cash.

A crucial tool for managing this process is a multi-currency bank account. Platforms like Wise, Airwallex, and Rho allow you to hold funds in their original currency, such as USD or EUR. This gives you the flexibility to convert to GBP when the rate is more favourable, rather than being forced to convert on the day of receipt.

From Data to Decisions: Using Your FX Variance Report

Now that you can see the FX impact, what do you do with this information? Incomplete or delayed FX variance reports make it nearly impossible to decide when and how to hedge, exposing the startup to avoidable losses. The solution is to build a simple, actionable report that transforms raw data into strategic insight.

A simple spreadsheet is often the most effective tool. To be useful, your report should provide a clear, line-by-line view of your FX exposure, tracking key columns for each invoice:

• Invoice ID and Customer Name
• Currency and Invoiced Amount (e.g., $15,000)
• Invoiced Amount in GBP (at the invoice date rate, e.g., £12,000)
• Settled Amount in GBP (at the payment date rate, e.g., £11,800)
• FX Variance in GBP (the difference, e.g., a £200 loss)

With this report, you can start asking critical questions about your foreign exchange impact on cash flow:

• Materiality: Is the total net variance large enough to affect your runway? A small loss might be acceptable, but a 5% negative variance on your monthly revenue is a serious problem.
• Concentration: Is one currency, like USD, consistently driving negative variances? This indicates a concentrated FX exposure for your small business.
• Direction: Are you consistently seeing losses over several months? This could signal a broader market trend that you need to address.

Once your analysis shows a material and consistent risk, you can explore strategies to mitigate it. One simple tactic is contractual; a currency clause may allow for repricing if the exchange rate moves beyond a set threshold, such as 5%. For more direct protection, consider hedging. The pattern across early-stage startups is consistent: consider basic hedging once a single foreign currency consistently represents more than 15-20% of revenue. A forward contract is a common tool that locks in a future exchange rate, eliminating uncertainty. Hedging services like Bound and Corpay can facilitate these arrangements. At this stage, those running finance often face the challenge of summarizing this data for founders.

A Pragmatic, Staged Approach to Currency Risk Management

This might sound like a lot for a founder juggling product, sales, and hiring. Your approach should mature with your revenue and exposure. For most Pre-Seed to Series A startups, the reality is more pragmatic.

Stage 1: Your First International Customers (Pre-Seed/Seed)

Your primary focus is accurate tracking. Forget hedging for now. The immediate action is to enable multi-currency features in your accounting software and open an account with Wise or Airwallex to receive and hold foreign currency. This gives you control and clean data. Your only goal at this stage is correctly managing overseas revenue by recording the difference between operational revenue and the cash you receive.

Stage 2: Consistent Overseas Revenue (Late Seed)

As international sales become a regular part of your business, your focus shifts to monitoring. Start building the simple FX variance report described earlier on a monthly basis. The goal is to identify patterns. Are your USD-denominated revenues now consistently more than 15-20% of your total? Are you seeing steady losses over a full quarter? This data-driven approach tells you when your FX exposure for small businesses becomes a material risk.

Stage 3: Significant & Predictable Exposure (Series A)

With larger, predictable foreign revenue streams like annual SaaS contracts, it is time to consider active risk management. This is the point to begin conversations with hedging specialists like Bound or Corpay. You can start with simple forward contracts to lock in rates for key invoices, protecting your cash flow. This is a key part of evolving your international payments best practices for the UK.

Practical Takeaways for Founders

Navigating currency volatility is a non-negotiable part of scaling a global startup from the UK. While you cannot control the markets, you can control your process for managing their impact. Getting this right is a key component of disciplined financial management.

• Track First, Manage Second: You cannot manage what you do not measure. Correctly setting up and using the multi-currency features in your accounting software is the most important first step.
• Separate Signal from Noise: Your core mission is to build a great business, not to speculate on currency. FX variance analysis is the tool that lets you separate your operational performance from market noise, giving you a true picture of your margins.
• Use the Right Tools: Modern fintech platforms are essential. Multi-currency accounts from providers like Wise and Airwallex give you the control and flexibility that traditional banks often lack.
• Scale Your Strategy with Your Business: Do not overcomplicate things early on. The journey from simple tracking to active hedging is a gradual one. Let your revenue concentration and the materiality of the risk dictate your actions. What founders find actually works is matching their response to their exposure, ensuring that managing currency risk supports growth instead of distracting from it.

For broader practice, visit the Variance Analysis topic.

Frequently Asked Questions

Q: Do I need a multi-currency bank account to track FX variance?

A: While not strictly required for tracking in your accounting software, a multi-currency account is essential for managing FX risk effectively. It allows you to hold foreign currency from providers like Wise or Airwallex and convert it to GBP when rates are favourable, giving you control over the final settled amount.

Q: When is FX variance recorded on my Profit and Loss statement?

A: Both realised and unrealised variances affect your P&L. Realised gains or losses are recorded when an invoice is paid and the cash is settled. Unrealised variances are accounting adjustments made at the end of a reporting period for any open foreign currency invoices to reflect their current value.

Q: Can I just use an average exchange rate for all my invoices?

A: No, using an average rate is not compliant with UK accounting standards like FRS 102 and produces inaccurate financial reports. For proper tracking of foreign exchange gains and losses, you must use the specific spot rate on the date of the transaction and the date of settlement.