One of the main risks is the threat of fluctuations in currency exchange rates. It is often in those initial exploration stages that we find SMEs reach out for guidance about appropriate currency strategies and currency hedging tools to avoid growing exports resulting in a financial headache.
One of the biggest problems UK exporters face is the dilemma of whether to hedge their future order book to negate the potential currency fluctuations.
As the global and European economies clamber struggle to regain momentum, SMEs can often experience large swings in their order book and as a result, forecasting foreign revenues becomes very difficult.
For SMEs the danger is that, even if their forecasting is correct and they do receive the expected amount of orders, they can build up debtors from abroad. This means any FX forward deals that are booked can become problematic as they have little visibility on when they’ll be paid and what the exchange rate will be at that time.
Some companies may have more visibility on their foreign order book, and in these circumstances forward hedging is a viable route to tackling currency risk. However, for those SMEs who have found success exporting their product abroad and do not have the confidence to hedge, then the uncertainty of agreeing prices is a real headache. There’s always the chance that the currency could move in your favour, but it’s a risk that SMEs would rather avoid as potential currency losses could easily wipe out the advantage of selling a product around the world.
Unfortunately, the uncertain economic environment and the impact this has on currency valuations is outside of a company’s control, but there are measures that SMEs can take to limit their currency risk when expanding their overseas sales.
We are speaking to an increasing number of directors who are looking to take a more proactive and sophisticated approach to managing their currency risk. Most are looking to achieve this by hedging expected overseas revenue rather than trying to second guess the unpredictable foreign exchange markets through and leaving it to the exchange rate on the day, which can be monitored using XE.com?
A portfolio approach involving spot purchases, forward obligations and option products is fast becoming the most popular way of managing currency risk.
The mix of these tools helps spread risk when attempting to achieve an attractive average rate for converting foreign currency back into GBP, but it also allows some flexibility in the amount that has to be converted. Using a portfolio approach will mean that if certain contracts from abroad do not materialise or payment is late, then it’s easier to manage the shortfall. It means SMEs have the confidence to leave a small amount to discretion and may only hedge 50% of their expected receivables.
Unfortunately, currency is a business risk that will not disappear for any UK company with aspirations to expand overseas. However, there are solutions available to minimise the risk of currency exposure.
In an environment when the UK pound is almost 25% weaker against the US dollar than its average in 2007, it remains an opportune time for UK companies to compete overseas. With the right currency management solutions SMEs should be able to maximise the returns on this opportunity.
Jonathan Pryor is the head of FX Dealing at Investec Corporate Treasury