Many UK businesses are not properly protected against the risks of overseas trade. FX fluctuations are often viewed as a storm to weather and a downside to trading in different currencies.
The first in a three-part guide, here we tackle the impact of currency fluctuation on your business and the agile risk-mitigation strategies that you can deploy to protect profits and allow for more accurate financial forecasting and planning.
Know Your Risk
Any business that sources stock or services overseas or sells products in foreign markets is at risk from currency fluctuations and unfavourable exchange rates. The trades approximately $5 trillion on a daily basis. Yet, it is often misunderstood.
Around 236,000 UK businesses are trading in overseas markets – it is a great way to diversify and grow revenue streams, secure cheaper materials and broaden your client base. If you secure goods from the USA you might secure a deal that has a favourable exchange rate initially, but 6-months into the agreement the pound has weakened. It now costs more to exchange currency, and this eats into your profits or could even see you trading at a loss.
Nothing can be done to prevent currency fluctuations. Political, economic and commercial risks all impact the FX market by the hour. You can’t prevent it, but you can reduce and mitigate the impact on your business.
As well as navigating currency fluctuation, transaction fees are another financial consideration. It’s common for businesses to overpay (even when the exchange rate is favourable) due to the number of touchpoints in international trade. Every time a bank or financial institution ‘touches’ your money there can be hidden fees to pay. Over the course of the year these hidden fees, each and every time you trade, soon mount.
The first step towards building a risk-mitigation strategy for your business is to understand your risk.
Assessing your risk is one of your best defences and allows you to tailor an appropriate currency risk management plan. Your first step is a currency risk assessment. This allows us to work with you to create and implement a currency risk strategy that is not only relevant but tailored to meet your unique needs.
There are 4 core factors to consider when assessing any potential risks:
- Timing –If you have a limited timeframe for exchange currencies it can limit your options.
- The amount –The more you need to exchange, the greater the potential risk and your need to be correctly hedged.
- Margin –The smaller your margin, the higher the need to monitor and manage your currency risk to prevent losses.
- Forecasting – The accuracy of your forecasting will influence your currency strategy.
If you buy and/or sell in other currencies, we can help you identify and manage the impact of currency fluctuations on your business. Your best rate is not one fixed number. It is a culmination of understanding the needs of your business, what moves the market and a deep understanding of the currencies and countries in which you trade, as well as upcoming and ongoing political and economic global events.
Central FX is a leading foreign exchange service protecting corporate clients since 2008. The benefits of overseas trade can be significant. Our currency risk assessment is a simple and effective way to understand and manage your currency risk. As a service-led, data-driven business, we help you to get it right the first time and every time.
Get in touch with one of our dedicated FX specialists to find out how we can protect your bottom line.
Part 2 of this series – Why Currency Exposure is Bad for Your Business, will be available in March.
Central FX is authorised by the Financial Conduct Authority (FCA) under the payment services regulation 2017. Our FCA registration number is 565847.