Foreign exchange rates have seen a major currency fluctuation over the past few years. If you look at the main foreign currencies that UK businesses deal with, at the start of 2007 £1 would have bought €1.50, whereas today it will buy €1.19. And sterling fell to its lowest rate in over 30 years against the $ in January as post-Brexit uncertainty continues.
For importers and exporters any significant movement in currency fluctuation values has a big impact on profit margins, especially when buying supplies in high value currency and selling in low value, which is the case for most UK manufacturers at present.
With UK companies facing the distinct possibility of leaving the EU single market and having to explore new overseas markets for growth, the need to understand and manage the impact of currency fluctuation is becoming more important than ever for SMEs.
Understand the specific currency fluctuation exposures in your business
Track the exchange rates of the major currencies that you deal with. There are plenty of websites and apps you can use such as TransferWise and XE to monitor them. It also helps to have an understanding of the political and economic landscape in these markets and their potential impact on currency values.
Plan your foreign currency requirements for the year
Look at the year ahead and work out when your significant foreign currency transactions will take place e.g. paying major suppliers or invoicing large orders. What rates have you budgeted for? If exchange rates move in your favour before these transactions take place then take advantage of them e.g. buy the currency early if its value has gone down against the £.
Forward buy currency
These contracts lock in the exchange rate for the purchase or sale of a currency on a future date. It’s essentially a hedging tool that doesn’t involve any upfront payment and brings certainty to your cash flow. You can do this using any major bank or currency broker. You need to understand the general trends of that currency before you agree the rate because if the exchange rate moves in your favour then you are unable to profit.
Invoicing in foreign currencies
You can make it easier for your overseas customers to pay by invoicing in their local currency. This reduces their currency risk and transaction cost and makes your products or services more competitive. This is a useful tactic if you can then use these funds for any expenditure in this currency.
Make your currency work hard
If you buy a foreign currency to pay suppliers and you have excess currency left over, you can use this to buy a different currency if it gives you a better exchange rate than against the £. E.g. After the Brexit vote and the depreciation of the pound against the dollar, buying dollars using excess Euros has offered better exchange rates.
This is where companies try to balance their supply chains so they are not exposed to a major currency fluctuation in too many areas i.e. sourcing raw materials and other supplies in the country of the final customer so that the business can hold product and price in the same currency.
You should get professional advice on your specific foreign currency needs from your bank or foreign exchange broker, and they can advise on the more complex financial instruments available to minimise currency risk as well.
Not all business banks will offer foreign exchange services to their smaller clients, but if they do, the stronger relationship you have with them, the more you can negotiate on the rates they offer.