If you’re a UK-based exporter, it is likely that you will require the purchase or sale of currency to facilitate your operations. Depending on how your supply chain is structured, this could involve one, more or all of the steps within the process, covering factors ranging from the purchase of raw materials to covering service provider fees, to converting income earned abroad back into sterling.
Why Is Currency Exchange Crucial to Your Bottom Line?
Volatility is rampant in today’s currency markets. The movement of currency exchange rates can be unpredictable. Events ranging from disappointing domestic economic data to decisions made by central banks in other countries have the ability to affect the currency exchange rate at the time that you require the purchase or sale of currency.
Even if some events are expected and priced into markets (meaning that they will have little impact on exchange rates), there are still unexpected political events that could affect your currency purchases without a moments’ notice. Therefore, exporters without a robust currency strategy are at the mercy of the fluctuating currency exchange rates, which can have a significant, unfavourable effect on your business’s bottom line.
Companies ranging from BAE Systems to Burberry have seen such negative results in recent years. The latter reported a boost in sales of some products, but an overall dent in both revenues and profit, due to unforgiving currency swings. Whether you’re operating an SME or heading up the finance division in a multinational corporation, if currency exchange affects a large proportion of your profit and loss statement, the lack of a defined strategy could put your profits at the risk of unfavourable currency market fluctuations.
How Can You Mitigate Risk?
There is a wide range of solutions available to help exporters mitigate currency risk. These range from simple spot contracts (buying on the spot) to hedging strategies like forwards (which allow you to reserve a rate now for future use), market orders (in which currency is purchased or sold on your behalf when it hits a pre-arranged level), or Currency Exchange Options (which are sophisticated hedging tools that are often tailored to fit individuals businesses).
In order to mitigate risk, it is crucial that you understand and monitor the currency markets, or have an expert do this for you. They should also be able to provide you with guidance on how best to mitigate risk for your business. It is with the best-fitting strategies in place that your company can minimise losses from currency exchange rate fluctuations, helping your supply chain to run smoothly – which has the added benefit of helping to improve your working relationship with your suppliers and clients.
Topics: Currency Exchange, Export Planning, Finance, and Getting Started