SME exports guide: How to protect your business from currency risk

It has been said before, and it can certainly be said again: the UK’s small businesses are a driving force for the UK economy. With the great success these businesses are seeing: many are looking to get a feel for overseas business prospects.

Whether you are a fledgling start-up or a long-running family business, if you feel your product or service is ripe for international expansion, there will always be growth opportunities for the ambitious. Looking beyond the shores of the British Isles has helped many UK SMEs grow, as exporting can offer great returns through the opportunity for increased profits, sales and expanding business size. 

Planning an exporting endeavour can be an exciting time, but it’s important that your financial considerations do not get lost amongst the excitement. Many small businesses might feel somewhat daunted by the financial considerations of trading internationally, but if you seek guidance on factors such as currency risk, it needn’t be as daunting.

Currency movements affecting your business

One of the biggest concerns for SMEs looking to export is often related to currency movements and how they could adversely affect the business. If you have only little export experience – this could definitely appear unnerving. With many small businesses operating on fairly tight margins, the impact of currency movements is one few can afford to ignore.

To explain how exchange rates can hit your business returns, let’s use the example of a fashion retailer selling a bag for $20.00 in the US market. The Pound value of a $20.00 bag will change depending on currency fluctuations. For a bag retailing at $20.00, the current exchange rate of 1.61 would mean a sell price of £12.43. However, a strengthening Pound could mean a reduced return – if the exchange rate hit the 1.69 mark a $20.00 bag would then be worth £11.83. As a guideline, it’s fair to say that adverse currency movements, if not properly protected against, could hit around 3-4 per cent of your business margins.

As well as a negative impact, there are also some currency movements that can work in your favour. For example, in the previous case of the exported bag, if the US Dollar strengthened – it would mean that sell price would have a higher pound value – playing out in the business’ favour.

Because of these fluctuations, it’s important as an exporter that you really get to grips with the currency risk you are willing, and able, to expose your business to. Understanding this appetite for risk will enable you to export knowing you’ve made the right considerations for your business, and are in control if the currency sways out of your favour. A business that has a strong foreign exchange strategy will be able to hedge against adverse currency movements, or will be well equipped to absorb the impact. 

For exporting businesses it is not a case of one-size-fits-all – there are a variety of approaches you can take to manage the currency risks you face.

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