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What does the Greek crisis mean for your small business?

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As chancellor George Osborne pointed out this week, there is no doubt that the situation will have a direct impact on the European economy. The UK and the companies within it need to be prepared.

Planning for the worst

You don’t need to have direct operations in Greece to be affected by the most recent crisis. If the events of the last few weeks have taught us anything, it’s that the unexpected does sometimes happen. Osborne is hoping for a last minute deal between Greece and the EU, but such an agreement is far from certain and a Greek exit from the euro zone seems just as likely. If the country does leave the euro zone and rejects long term funding from the European Central Bank (ECB), Greece will begin printing its own money – likely the drachma.

The markets and in particular the currency market do not respond well to such uncertainty. Stock markets around the world have already reacted to the Greece “no” vote, with the value of the euro against the pound falling 11 per cent on this time last year. Such currency fluctuations can have a direct impact on business success. Those who operate in Europe will see their profits hit as they convert revenue back to GBP if they do not take the necessary precautions to protect themselves. 

Small companies are unlikely to have access to expensive terminals showing live market rates, an in-house foreign exchange (FX) expert, or benefit from preferential treatment and rates from the banks to help them hedge against FX risk. That said, with the right risk management techniques in place, even the smallest company can effectively protect their business from significant financial losses and unnecessary costs.

An FX strategy should consider the amount of risk a business is able to absorb without significantly denting profits. This will vary depending on a few key factors – profit margins, the profitability of the business in general, and perhaps most importantly, individual appetite and tolerance for risk. 

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There is fear that the euro could continue to tumble and reach below 1.0 against the dollar. This level is the point at which it will take a single dollar to purchase a euro –known as “parity”. Such a drop would have a significant impact on global markets. As such, there is no room for optimism in such situations. When factoring the potential impact of FX movements into the business forecast, SME-owners would be wise to plan based on a “worst case scenario” outcome.

There are however some benefits that will come from a low euro rate. Imports from euro nations will be cheaper while the currency stays low, however in this ever-changing economic situation it is important companies don’t count on these cost-savings as a long-term business strategy.

Further afield

Those that export outside of the Eurozone could also face problems thanks to the global market volatility caused by the Greek crisis. The developments in Greece are likely to reinforce the weakness in emerging market currencies. The ringgit of Malaysia, the Polish zloty and Turkish lira have all taken a hit this week. It’s crucial that business owners consider their FX exposure beyond the euro and take measures to address the potential risks they face.

Within your FX strategy it is important that companies consider limiting their exposure to the euro as far as possible without impacting profit margins. If possible, it could be wise to conduct new business in USD or GBP for the time being while the euro fluctuates.

With the news surrounding Greece changing on an hourly basis, it’s easy to get lost in the latest developments, or even assume that such a situation will not directly impact your company. However, small businesses should not underestimate the effect of global economic crises on their business operations. It is important that companies of all sizes put strategies in place now to protect themselves from the risks of market volatility now, to avoid paying the price as the situation continues to play out.

Philippe Gelis is CEO and co-founder Kantox.

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