Despite a public vote to exit the European Union, the government is still expected to lobby for continued membership of a club deemed all-important to businesses – the single market. The outcome will be critical to anyone who imports to, exports from or hires in the UK.
But, regardless of the outcome, many businesses have already been affected, and not all for the better.
The Brexiteers promised a golden age of trade with markets around the world. When negotiations finally begin, we may indeed see benefits for exporters. But the collapse in the value of the pound has meant the net impact for many small and medium UK businesses is negative.
For them, that movement since June has pushed up the cost of importing goods they need. The average importer has a profit margin of around 20 per cent. A 12 per cent increase on expenses – the same amount by which the pound fell in days after the referendum – would gobble up more than half of their profit.
No wonder most analysts expect that to mean increased costs for consumer goods, as companies pass on the hike. And that could lead customers to turn away.
So how should small and medium-sized UK companies respond? Most important is to reduce your exposure to further fluctuation. That means business owners should, at next supplier refresh, reduce the amount of inventory they hold.
Holding on to inventory bought at one price means you risk incurring further loss from devalued stock if the pound falls even farther. This means over-exposure to a movement, which could yet happen in either direction.
Business owners should not think about buying stock low in anticipation of a favourable movement suddenly inflating their assets overnight. Their job is not to manage currency risk on the global markets. Instead, it is to import at best cost and sell at the highest cost. If you want to gamble on the market, go and become a forex trader and forget about running a business.
Eventually, the market will rebalance itself on the pound’s new value, whatever it settles at. Until then, importers’ best course of action, when buying stock, is to act fast, repeatedly. We have all heard about “just-in-time” operations – your job is now to acquire stock, use them and sell products in quick turnover, so reducing the window you hold anything at any given price.
It is a shame that those worst affected by the pound’s decline will be smaller, rather than larger, businesses. Any low-margin import businesses also have smaller net profit with which to absorb the changes, whereas large companies have treasury departments, which have the know how, as well as the funds to buy Options and Forwards on the FX market. Therefore, it is unlikely that large businesses will incur meaningful losses out of such large currency movements.
Smaller businesses should be so lucky. I recently heard from one business that imports aluminium which has been hit hard, putting the whole company in jeopardy. Meanwhile, a customer relations VP tells me their partners have been simply reluctant to make cross-border payments with UK firms.
For exporters, the currency fluctuation means an opportunity. Suddenly, the foreign-currency price paid overseas goes farther back at home. Local producers may well find themselves in positive territory.
But, if the UK cannot secure a place for itself in the single market, businesses may well end up with import taxes on UK exports – something which would wind up adversely affecting UK exporters nevertheless.
Until negotiations conclude, it is hard to predict what kind of settlement may be reached. For now, however, businesses should act fast, live for today whilst being mindful for tomorrow.
Share this story