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.
Read more about building an effective currency strategy for your business:
- 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
However, such incidences should not dissuade business leaders from seizing international opportunities. If navigated effectively, cost savings can be driven by engaging international suppliers, while entering into new export markets could significantly expand a firm’s revenue streams.
Perhaps the most important thing to learn from the way currency fluctuations can affect big business, is that doing nothing is the worst approach. Any business that already takes part in, or is planning any import or export activity, must have a secure FX strategy in place. This could range from simply understanding the ways strong and weak currencies affect the prices at which goods are bought and sold, right up to securing rates and forward contracts.
Invoicing in Sterling can be one way to protect a business’ bottom line from changes in exchange rates. If suppliers and customers are happy to trade in this way then this can be a low-risk option for small businesses compared with invoicing in foreign currency.
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.
The importance of planning ahead is only increased by the looming EU referendum, with many financial forecasters predicting a weakening of the Pound in the event of a Brexit. A combination of forward thinking and careful financial planning will ensure businesses are prepared to weather any short or longer-term market changes.
The lesson to take away from the financial woes of Easyjet is a simple one. No one is immune from the effects of currency fluctuation, no matter how big or small the organisation. As soon as firms start conducting business in a foreign currency, whether that be import or export, they are exposed to a degree of risk. Luckily, equipped with solid financial knowledge and a certain degree of foresight, SMEs can ensure that these risks are minimised and business leaders are able to focus on stability, prosperity and growth.
Graham Seddon is partner at accountancy firm Menzies LLP.
For the many British businesses that currently trade within the EU, a vote to leave the European Union could have a devastating impact due to the currency exposure it would entail.
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