Prior to Brexit and the recession, concerns regarding currency volatility and the impact it could have on a business’s bottom line were less ubiquitous. In today’s climate however, concerns are ever-growing, particularly for enterprises that conduct business internationally, due to the current global economic uncertainty and subsequent exposure to foreign exchange risk.
With the pound plunging against a number of currencies, including the US dollar and Euro, the days of pricing strategies, such as currency buffers to protect against volatility are long gone, as they now demonstrate little to no effect as a protective strategy. As a result, many finance directors are exploring newer methods of protecting themselves against currency exposure, in addition to looking more broadly at their end-to-end international payments process.
The financial dangers forced by the volatility of the currency markets makes precise business forecasting extremely challenging and highlights the significance of currency risk management tools in ensuring the cost of expanding into international markets doesn’t potentially outweigh profitability.
With a vast number of businesses making international payments to multiple foreign beneficiaries, many neglect to use currency management tools as a means of protection from currency volatility. So, what tools are available?
Tools to Protect your Bottom Line Against Adverse Currency Movements
- Forward Contracts
A forward contract enables a company to secure a fixed exchange rate for payments scheduled in the future. This means protecting themselves against currency market volatility. The option to secure the rate helps mitigate the foreign exchange risk, protects the company’s margin, and enables them to predict their cash flow more easily.
- Monitoring the Market
Should a company have a target exchange rate in mind, an FX specialist will monitor the global market on behalf of the company 24 hours a day, for free. This is an extremely useful process, particularly if you’re happy to wait a little longer to achieve a more desirable exchange rate.
- Standing Orders
Currency standing orders are also a good tool offered by specialist FX providers to protect your bottom line. This variety of personalised service is in stark contrast to the service offered to businesses via their banks.
6 Tips to Protect your Bottom Line from Currency Fluctuations
- Approach a foreign exchange specialist
For it to be a success, a foreign currency strategy needs to match the individual needs of your business. Yet, without a specialist FX provider at hand to offer their expertise, you will likely be burdened with a one size fits all approach, resulting in your unique requirements not being met.
- Identify Forecasts for the Year Ahead
Make time to decide what your company will be spending and when you’ll be making international payments over the next 12 months.
- Set your Budget Rates
Work to determine what you need to remain profitable, then target strategies that will help you to protect your baseline profit.
- Don’t Confuse your foreign exchange Strategy
Make certain you know your hedging strategy and its effect on your business. Ultimately, your strategy should protect your company’s bottom line without distracting you from your everyday operations.
- Don’t Rely on Currency Gains to Prop up your Bottom Line
Implement currency strategies that let the underlying business make your profits as opposed to relying on currency gains to prop up the bottom line.
- Don‘t Overhedge
It’s advisable that you leave a portion of your currency needs unhedged. This way you have some room to move if anticipated contracts fall through. Doing so can also mean your business gains from any potential increase in exchange rate activity.
In Need of Dedicated foreign exchange Specialist Support?
If you’re looking for dedicated FX specialist support, at Central FX you’ll find that from the moment you register. A dedicated FX specialist will work with you to understand your business and develop a strategy for mitigating risk.
Our experts ensure that you never lose sight of your business’ operational and financial objectives by striving to implement a successful strategy to suit the individual needs of your business. For further information, please contact us today.