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Ride high on the fall in sterling

"The Institute of Export has seen a marked increase in demand for its services in the wake of the credit crunch, as bosses seek to spread the risk created by a weakening sterling.

"Creating a robust strategy is more crucial than ever in a climate of global financial uncertainty. Finance directors should step outside of the day-to-day activity and work ‘on’ the business plan. The time to seek advice is before you have even decided on the countries you are going to trade with and certainly before any of your cashflow is translated into other currencies.

"There are two main areas to manage on fluctuations in currency markets. The first is to maintain currency accounts for markets you are active in to their advantage and secondly to adapt supply chains to take advantage of improved exchange rates.  

“For any firm trading internationally in foreign currencies, the key is managing risk. Of particular importance to finance directors should be the short-term cashflow problems that can be caused by shifts in exchange rates. Often I see senior finance personnel taking the approach that in the long term exchange rates will broadly balance out.

“Not only is this a rather optimistic view, but it suggests there are many UK businesses failing to manage the risks currency movements can create, seriously harming their competitiveness.

"The most straightforward way to manage your risk is by maintaining a trading account in frequently used currency. There is a tendency for UK businesses to quote and work solely in sterling, immediately undermining their products profitability. Finance directors should be able to justify holding onto some trading currency as you are immediately insulating yourself from a significant depreciation in sterling, as well as saving on transaction charges.

"For FDs with a keen eye on money markets, such reserves can often seem a useful channel into a degree of currency trading. However, be strong against this temptation. Finance teams should focus on getting the basics right and not dabble in speculation.

“Obviously, there is a sales advantage gained by working in local currency but in doing so, you do take on the risk of movement in currency markets impinging on your margins. Plan carefully how you will fulfil the currency requirements of contracts, and if dealing in particularly large amounts you should consider forward trading to insulate this risk.

"If your finances do not allow you to maintain multiple currency reserves, operational changes can also deliver benefits of a depreciating sterling. Too many UK firms work on a ‘cost-plus’ basis, rather than looking at what is achievable in each market and developing a pricing strategy that incorporates the effects of exchange rate shifts.

“Particularly when dealing with mass-produced goods, a small fluctuation can impact heavily on costs to the point where moving production to a different location or switching supplier can deliver significant savings. Many firms are now spreading risk across regions as well as across currencies.

“The savviest operations are able to switch production at short notice according to market shifts and can take advantage of seasonal trends in particular markets to plan their currency purchases in advance.”

"Despite growing risk internationally, I believe UK businesses are well placed to weather the storm. There is a tremendous amount of support on offer to operations of all sizes in the UK and abroad that puts British businesses in an excellent position internationally.

"The challenge to finance directors is ensuring that they manage the fall in the value of sterling, developing a strategic approach to their finances and marketing, and building a strong platform from which to grow."

*Lesley Batchelor is the chair of the Institute of Export. The organisation supports UK businesses of all sizes that are expanding overseas.

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