Leadership & Productivity
Hedge your bets: Keeping an eye on the pound when trading overseas
5 min read
06 September 2017
Trading overseas is fraught with challenges, and one important thing is to keep an eye on domestic currencies.
One way of scaling up a business is to look for overseas customers. While in some ways exporting has never been easier, the weak pound should now be a considerable factor when considering this option.
The weak pound
There’s no denying we are living in chaotic times – the value of sterling has been jumping all over the place for the past year or so, as it is hurled about on the winds of political change.
First Brexit, then a snap election, and now the country is preparing to finally leave the European Union.
All of these things affect the value of our currency, and the value of the pound changes depending on the rates of supply and demand. When the UK economy looks unstable, the value of the pound will drop as foreign investors eye it with caution.
Initially at least, this sounds bad. Certainly, if you import goods or services from abroad, it might be bad news – your currency is now worth less overseas than before, so you will have to stump up more money for the same goods.
However, if you export goods, your prices have suddenly become more competitive. Foreign buyers can purchase your goods at the same rate, but for them it’s now something of a bargain.
Overall, despite the UK’s withdrawal from the EU and, potentially, the single market, the weaker pound could offer great advantages for businesses looking to embark on exporting opportunities.
Getting caught in the crossfire
It is worth mentioning that it is not as clear cut as this for all businesses. Sometimes, an unsuspecting business might get caught in the crossfire.
For example, if a business deals only with businesses in the UK, but one of its suppliers imports from overseas, the weaker pound can impact upon the whole supply chain.
In other words, if one of your suppliers is now facing higher costs, it may not be able to absorb the costs, and may try and pass those costs along to you.
There is not much that can be done about this other than to accept it and absorb or pass the added costs along yourself, or search for a new supplier.
Shoring up your currency
If a business is operating overseas or would like to begin doing so to take advantage of the opportunities offered by a weaker and more competitive pound, hedging currencies is a good idea.
Setting up a hedge allows a business to buy currency when the rate is favourable to them, and locks the exchange rate in for a set amount of time. There is a cost for doing so, as the risk of currency fluctuation is passed on to the organisation they’ve set up the hedge with.
This way, if a currency drops in value, the negative effects are not felt by the business itself – however, it also forgoes any positive effects it may have benefited from.
Hedging is a bit of a gamble, but it’s one the larger organisations taking on the hedge can more easily manage than a small business. For small businesses taking the first steps into becoming a global brand, certainty is something to be valued as it enables a greater understanding of cash flow.
There are so many variables when it comes to exporting, and hedging your bets in this way can take some of the pressure off.