
The opportunities afforded by entering into international markets present an excellent avenue for business expansion, one that should not be overlooked by SMEs. While currency fluctuations are somewhat of a concern for many businesses, smaller firms must take heed of the mistakes made by large corporations in order to guard themselves against market shocks.
Trading in a foreign currency will always carry a degree of risk but by planning ahead and having a secure financial strategy, SMEs can ensure international trade is a profitable and commercially viable option. Airline giant Easyjet is the latest multinational corporation to have paid dearly for failing to negotiate currency fluctuations. Despite announcing impressive growth in passenger numbers and revenue, quarterly profits swung from £7m in the first quarter of 2015 to a huge £24m loss for the same period in 2016. Its own analysis attributed this loss almost entirely to a softening of Sterling against the Euro and suggested that if the currency had remained flat, like for like profits would have dropped by just £2m and not £31m. Looking at currency fluctuations from the start of 2016, this analysis starts to make sense. At the beginning of the year, £1 was worth around €1.36, two months later £1 would get you approximately €1.26. That’s a fall of 7.5 per cent. While transactions of this magnitude are much larger than those made by SMEs, the effects of currency fluctuations are scalable and businesses of any size could be hit just as hard as Easyjet.- Protecting the bottom line through currency hedging
- Export to grow: How SMEs can manage foreign exchange costs
- SME exports guide: How to protect your business from currency risk
Forward contracts are another key tool for businesses looking to minimise risk when trading internationally, as they can offer a greater sense of certainty and peace of mind. This tactic is especially helpful if a business works on a contractual basis – knowing that the rate on the day of the deal will be the same as the rate in four months’ time can be a great benefit when compiling accurate financial forecasts and budgets.
Image: Shutterstock
Share this story