King had to transfer funds from sterling into yen, so he used a “spot contract”, a basic agreement to buy or sell one currency in exchange for another. However, in mid 2008 the relationship between sterling and yen became volatile.
“The rate went from 212 to 113 in a very short space of time,” explains King’s finance director, Charlie Wong. This meant that King of Shaves was essentially paying more for the blades – a cost that came straight from the bottom line.
“We wanted to avoid a similar situation re-occurring, so we used a forward contract which allows you to fix an exchange rate for up to two years paying a ten per cent deposit,” says Wong. “This eliminates the risk of fluctuating exchange rates by locking in a rate for a transaction that will take place in the future.” Wong says he avoids fixing a rate too far in advance, just in case the money markets pull in the opposite direction and he ends up losing out. “The shipping terms mean that we have 60 days once the blades are out of the water to pay, so we set a rate for between three and six months in advance, making sure we don’t suffer from any sudden adjustments in the exchange rate.”
Using a forward contract saved the company a whopping £600,000. “When you are making a payment of anything up to £1.5m and there is depreciation in the value of sterling by 30 per cent, it has a severe impact on costs,” says Wong. “Last year the rate actually fell by 36 per cent at one point and we were forced to absorb significant losses.”
At the Growing Business Awards judging day earlier this week, Will King told us he had just raised £1m through his "shaving bond" scheme, where he gave customers the chance to buy bonds in the business at six per cent interest a year. Nice one, Will!
The Growing Business Awards takes place on 26 November. Click here to book tickets.
King of Shaves uses currency specialist Foremost Currency Group to help manage its foreign exchange risk.
Related articles:Growing Business Awards judging day: Entrepreneur of the YearWill King issues "shaving bonds"
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