In fact, irrespective of whether a UK-based company is involved in more than one geographic market or not, the chances are that they will feel the impact of macro-economic events on the other side of the world in 2016. The big two questions are why, and what can they do about it?
Firms of all sizes are significantly exposed to currency fluctuations due to the fact that many companies are reliant on cross-border business – such as sourcing from abroad and exports – and therefore swings in currency values can affect the bottom line.
However, despite many businesses preparing for risks such as energy cost fluctuations or headline inflation, far fewer SMEs prepare for foreign exchange-based risks.
In making the case for risk management, it is first important to look at how the domino effect of economic data can affect matters closer to home.
Recent weeks have witnessed matters 4,800 miles away in Beijing, and indeed closer to home at the Bank of England, significantly affect the currency markets.
The current market swings that have seen the value of sterling slump against the euro and the dollar is due to a cauldron of different issues, most of which relate to the volatility of the market and the fact that London’s blue-chip index has declined by about 17 per cent.
This has caused concern for investors who fear additional pressures such as lower oil prices and China’s economic slow-down could intensify pressure on FTSE companies.
Those investors are likely to remain cautious with key market commentators like governor Mark Carney continuing to fret about global threats and recent gloomy ONS data showing manufacturing has slowed down in the UK.
For British SMEs, these may seem like distant influencers. However, a serious global slowdown could foreshadow some more wild days for share prices and currency values in the months ahead.
The main issues will be for importers and exporters dealing with these fluctuations, and in particular when it comes to trading with our main partner, Europe.
Read more on foreign currencies:
- The bull in the China shop: Money managers short on history and long on panic
- Don’t hoard, hedge: Why holding on to your Euros is risky
- Currency concerns top list of exporting hurdles
After all, whilst there is no doubt a weak pound for importers makes things more expensive and trickier for cash flow forecasting, for exporters the question will be whether or not to buy sterling at this rate or wait for the pound to depreciate further and try to achieve a lower average rate.
On the surface, for manufacturers whose order books have stagnated due to a strong pound and the protracted weakness of the Eurozone, the weaker pound will look like a blessing.
A weaker pound should lead to an increase in demand for British goods overseas and hopefully boost their profit margins. Likewise, companies looking to make the most of opportunities in Europe, where growth and demand is high, may also believe it is beneficial to move away from domestics or increase exports.
In both of these instances there is a need to remain cautious. What they are exporting may be seen as good value for Europeans but unless the forex rates are at the best they could be, the company might lose out on millions in potential profit or receive a lesser return on their investment.
Similarly, inflexible companies such as importers of fashion, raw materials or food items from Europe could end up significantly overpaying if their exchange rates are unfavourable.
So whilst the high street might hope to see benefits as tourists try to get bang for their buck in retail, for smaller shops or businesses that import their products this may posit an especially difficult period.
At the end of the day, whether an SME is an importer or exporter or both, the cost of currency transaction can massively impact the company’s bottom line. Switching to a better rate and securing the right information could better protect profit longer term as well as securing an immediate saving for the business. There is also the shadow of the great Brexit question looming and the inevitable uncertainty it will bring.
Of course, there are tools available that give SMEs some control over exchange rates and help to mitigate risk.
Forward Exchange Contracts, Limit Orders or other more complex solutions can help lock in favourable exchange rates ahead of transactions.
Yet whilst these can allow for more accurate business forecasting, and protect businesses from fluctuating exchange rates, they can also mean missing out on potential rises and falls that could be more favourable in the future.
What business owners large and small should be pushing for are forward-looking conversations with their brokers, and for bespoke advice to suit their particular need. Forex can pose conundrums in business, but these situations need not be insurmountable with the right approach.
With the forex sector so hot at the moment, one British business introduced a money conversion service that secured the recognition of Richard Branson, TfL and Westfield London with the term “currency exchange on steroids”.
Richard de Meo is MD and founder of Foenix Partners, an award-winning corporate forex company
Share this story