Why is it that more businesses blame poor results on currency movements?
Contributed by Godi
16 October, 2017
For any business importing or exporting, dealing in foreign currencies is an unavoidable prerequisite. Despite this, we are continuing to hear of companies blaming unforeseen movements in the currency markets as a key driver for poor performance – UK retailers, White Stuff & Sports Direct, are two recent high profile examples. Is such an oversight of what is now a fundamental part of international trade really a palatable excuse in 2017?
The volatility in the foreign exchange (FX) markets caused by seemingly constant political and economic upheaval has resulted in increased uncertainty and this will inevitably continue in the medium term – making the implementation of a robust corporate forex strategy for managing currency fluctuations a modern business imperative.
For UK based companies or those dealing in Sterling currency pairs the past 15 months has of course been particularly challenging following the UK-EU Referendum. Whilst it has opened up a potentially golden window of opportunity for UK Exporters, it has been nothing short of disastrous for UK importers who have seen their costs sky-rocket due to the dramatic decline in Sterling. At one point GBP/EUR had dropped close on 18% from pre-referendum levels, and even now at 1.1093 stands down some 15.6%. Similarly GBP/USD having hit a high of 1.5018 on the evening of the referendum had declined by 21% during October 2016, however due to broad-based US Dollar weakness since then (reasons include President Trump, North Korea & Hurricane Harvey/Irma) at the time of writing the rate is now down just 11.6% at 1.3275.
Foreign exchange risk management should be a key focus of any finance director but particularly those working within a small-to-medium sized enterprise (SME). For large corporates, being careless about currency risk can have a huge impact, however for SMEs it can be catastrophic. This makes it all the more surprising just how few SMEs are putting plans in place to minimise their exposure to currency fluctuations.
For those who don't have an effective strategy in place, there are tools available to help manage and 'hedge' this currency exposure. Forward contracts can be an effective way to minimise or eliminate FX risk. A forward contract allows you to fix the current exchange rate for a settlement at an agreed date in the future, making your FX a fixed cost. This can help provide certainty over the costs of your international payments enabling you stabilise your cash flow, protect your profit margins and reliably forecast.
If you can accurately forecast your quarterly/annual revenues and expenditures that will then allow you to lock in a percentage of that exposure for settlement at a future date, negating a large part of your risk to currency fluctuations.
SMEs should look to work with a trusted FX provider who will take the time to analyse your company's exposure and really explain what kind of hedging products, such as a forward contracts, are best for your business.
We'd like to thank Godi for this insight.
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