Since the recession took hold, the pound has dropped in value against almost every major currency including the US Dollar and the Euro. But, whatever your thoughts on the outlook for the UK economy, there is no doubting that exchange rate volatility over the last 12 months has left Britain’s small business importers and exporters struggling to keep track of currency developments. A range of political and economic pressures across the globe have created major fluctuations in many currencies over the past year and these pressures show no sign of stabilising to the predictable levels that were common before the credit crunch.
Imported goods have pushed up basic prices for British firms and inflation is well above the Bank of England’s targets of 2%. Moody's, ratings agency, has said the UK could lose its AAA rating if growth remains weak and the government fails to meet its budget deficit reduction targets. The Government subsequently has said its outlook for Britain was stable, though it may reconsider if its targets were missed.
Small and medium-sized firms trading with global partners remain particularly exposed to shifts in currency value. With this in mind, we at HiFX, set out to discover just what challenges Britain’s SME exporters and importers have faced during the year, how they had managed their companies against the backdrop of ongoing exchange movements, and what their hopes and needs were for the future, both in terms of their businesses and the foreign exchange facilities that serve them.
Effect of FX volatility on UK SMEs revealed
The business trends report conducted by HiFX has highlighted that the average SME importer or exporter has a turnover of £500,000 and foreign currency exposure of less than £250,000. Almost half of this group (48%) admit that exchange rate volatility has had a negative impact on their operations over the past year. SMEs operating in IT and telecoms, construction and retail were the worst affected whilst those operating in media, marketing and the UK property industries were the least affected or even benefitted from the strength of sterling.
Looking ahead, over four in 10 (43%) anticipate that any currency changes will have a negative effect on their operations. However, despite many suffering from currency fluctuations it has been interesting to see that almost a third (30%) are more positive, expecting to benefit from foreign exchange shifts throughout 2011.
The business of trade…
With increasing globalisation, more businesses than ever have become involved in international trade, however, conservative estimates reveal that up to 850,000 SMEs in the UK, yet just 22%, regularly keep an eye on exchange rates. Those that do not do this risk leaving themselves open to foreign exchange rate movements that can quickly erode profits. Large corporations can afford to employ teams of market professionals to manage foreign exchange risk at enormous cost, but this is often not the case for smaller businesses. The risks presented by the currency exchange market can be avoided with the right help and insight. Understanding the fundamentals of foreign exchange can provide a business with stability and peace of mind when dealing with foreign companies, payments and receipts.
For a company which imports or exports goods, a small fluctuation in the exchange rate can have a considerable effect on profits. Exchange rate movements should not be ignored as money may be lost if the exchange rate fluctuates between placing the order and paying for it. The longer the timeframe of the transaction, the greater the uncertainty and the more likely the cost will rise.
Small companies face risks
Insight from our FX Dealing team suggests that smaller companies (particularly if their margins are tight) are affected significantly when there are movements in exchange rates, which can have a drastic impact on their bottom line. Fixing the exchange rate from the start of a contract ensures a business can accurately forecast costs and profit margins on any export transaction.
Currency products and solutions
Forward contracts and market orders are tools businesses can use to manage their risk and protect their costings. Dealing solely in the spot market can be a high risk strategy, as exchange rates can move significantly in a short period of time and you could lose significant amounts if the exchange rate moves against you. By locking into a forward exchange rate, for example, you know the exchange rate you will achieve, which will therefore give you piece of mind.
There are many ways to buy foreign currency. The most common are:
Spot Contracts - This is essentially a ‘buy now pay now’ option.
This is effectively a ‘buy now, pay later’ scenario, allowing you to lock in a rate, even if you don’t have all your funds available. Should the exchange rate worsen you will not be affected. However, it is important to remember that if the exchange rate improves, you will not be able to alter your contract.
If you are looking to achieve a specific rate, we can arrange a Market Order. This allows you to target a specific rate of exchange. Market orders are monitored around the clock and our experts will help you establish the appropriate levels at which to place them.
With volatility high up on the list of concerns for small business owners it is important for them to make sure they get the best deal on their foreign exchange. The current volatility in the markets may mean that those benefiting from a move in sterling could just as quickly see a change in their fortunes. With this in mind, HiFX would urge SMEs to look to alternatives to banks such as FX brokers to make the most of their money in these turbulent economic times.
For more information on foreign exchange strategies, please contact Jason Gaywood on 01753 751776, or visit our website www.hifx.co.uk