Managing currency fluctuations when trading overseas
Paul Bennett, Managing Director of Fascia Graphics discusses why currency fluctuations can be crippling for any export business and provides some essential steps to protecting yourself…
Despite the continuing political turmoil in the Eurozone, a recent survey of some of Britain’s biggest manufacturers has found that they feel optimistic about increasing their exports over the coming year. Almost two thirds (58 per cent) expect their profitability to increase over the next 12 months, while a similar number (66 per cent) are confident about improving turnover.
Furthermore, the poll of 2,300 exporting businesses, conducted by the British Chambers of Commerce and DHL Express, found that a third of exporters had reported an increase in export sales in the final three months of 2014.
Despite these encouraging numbers, the survey found a third of British exporters were having issues with the exchange rates and these were impacting on their ability to trade internationally.
We at Fascia have been trading overseas for a number of years and understand the trepidation that a fluctuating exchange rate can cause, having experienced first-hand the issues it can cause.
These currency variations can be a big cause for concern for SMEs exporting their products due to the propensity for a long delay between agreeing a deal and actually getting paid for it – sometimes several months or more.
During that time, there may be fluctuations in the exchange rate, which can dramatically affect how much money, in pounds sterling, you actually receive. Even a ten per cent swing in an exchange rate can be enough to wipe out the entire profit on a deal. A larger swing in the wrong direction could result in total financial ruin for an SME with no currency protection in place.
There are a number of things you can do to protect your business from sharp rises and falls in foreign exchange rates:
Starting with Forward Contracts
One of the simplest ways is to use forward contracts for your large deals. This basically means that you fix in advance the exchange rate at which you buy or sell currency on a particular date up to 12 months ahead, thereby locking in the price. This provides you with certainty and peace of mind, and enables you to lock in the profit you make on a deal. So if a sale is worth £10,000, then no matter what happens to the exchange rate in the meantime, you know that you will still be getting your £10,000.
Once you are comfortable using forwards contracts, there are other, more complex ways of making sure that your business is protected from adverse currency movements. For example, you can set lower and upper limits at which your business buys currency over a particular time period.
Whereas a few years ago, small businesses often found it difficult to access these kind of services, largely because the banks providing them were more used to dealing with the needs of large corporate clients, there are now several currency brokers in the UK that specialise in providing tailored exchange-rate services for SMEs.
The first step is to find an exchange-rate service provider you trust and then make sure you always understand exactly how an exchange rate product works – and what the advantages and disadvantages are – before you agree to use it.
Whatever you do, do not do nothing. A recent American Express study of 500 UK SMEs found that more than half did not protect themselves from currency risk when trading overseas, even though a third admitted currency fluctuations were their main concern.
Most importantly, don’t let exchange rate uncertainty deter you from doing business overseas. The great thing about export markets is that they give your business a more diverse customer base, so it becomes less vulnerable to economic fluctuations in a single market.
Indeed, according to Government research, companies that export their products and services overseas are 11 per cent more likely to survive than those that don’t.
This was posted in Bdaily's Members' News section by Paul Bennett .