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Shelter your business from forex storms
Currency volatility is an increasing headache for small-business owners. But there are steps you can take to combat currency fluctuations.
For many small and medium-sized enterprises (SMEs), the tangible effects of Brexit uncertainty today are a bigger issue than the nature of our post-Brexit trading arrangements. In particular, currency volatility is an increasing headache for business owners.
As many as 60% of manufacturers have become more worried about exchange rates over the past three months, while 43% of services businesses are more anxious, according to research published by the British Chambers of Commerce this week. That's not surprising: exchange-rate volatility remains unusually high and the value of the pound continues to slide compared to a decade ago, sterling is now down more than 50% against the dollar and almost as much against the euro.
Practical steps to take
How, then, do businesses mitigate the worst effects of currency volatility? While it makes sense to take professional advice on currencies rather than take a punt on exchange rates, there are some practical steps SMEs can take. Start by finding the best-possible deal when moving money across borders with a regulated money-transfer business. For many SMEs, this should be reasonably straightforward: competition in the money-transfer marketplace is increasingly intense, with online entrants to the industry reducing or abolishing fees while also offering keener exchange rates.
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Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
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It may also be worth considering hedging against currency movements, particularly for businesses that know they will have sizeable sums coming in or going out from overseas at specific times. Your bank, or a specialist foreign-exchange adviser, can help you reduce the risk of currencies moving in the wrong way through forward contracts. These are agreements to buy or sell a certain amount of currency at a set rate on a particular date in the future.
SMEs with dealings in certain markets particularly developing economies need to take even more care. The value of currency in these countries tends to be especially volatile and therefore poses a greater level of risk. It will almost certainly pay to take professional advice on how to manage this danger. More broadly, all SMEs should aim to develop a better understanding of the markets in which they deal, which will help them with the basics of managing currency risk for themselves for example, by identifying events or trends with the potential to generate additional volatility. We have been reminded recently that emerging-market currencies can be prone to sharp falls when US interest rates and the dollar rise.
Finally, remember to focus on both import and export costs. The recent weakness of sterling has increased the price competitiveness of British goods in overseas markets. But businesses that depend mostly on imported goods raw materials in the supply chain, for example have suffered disproportionately.
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David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.
