29/07/2010

By Stewart Blake, Chief Executive of Global Reach Partners

While market chatter suggesting Government fiscal policy may precipitate a so-called ‘double dip’ recession in the UK isn’t yet deafening it is certainly loud enough not to warrant casual dismissal. Regardless of your view of the Coalition’s deficit cutting strategy, the unwelcome prospect of a spike in business insolvencies during the final quarter of 2010 seems increasingly real.

Public sector job cuts seem bound to undermine domestic demand for goods and services. The winding down of the HMRC Time to Pay will squeeze those businesses who have fallen into the habit of sweeping bills under the proverbial carpet for payment another day.

The potential bad news doesn’t end here for UK exporters. The latest Markit / CIPS survey revealed a sharp slowdown in British export orders during June, with manufacturers appearing particularly vulnerable to the slowdown in the Eurozone.

In this context a Forum of Private Business survey commissioned by Global Reach Partners to mark the launch of Smart FX, a web-based payments system, reveals that global currency market instability is further discouraging already vulnerable-feeling UK companies from trading overseas.

Nearly two thirds of the businesses polled cited currency fluctuation as a prohibitive factor in doing business outside the UK. This compared with just 28 per cent who pointed to rising import and export duties and the feeling of increasing protectionism as an inhibitor.

In an operating environment hallmarked by tight margins, the report’s finding that 44 per cent of firms believe currency fluctuations to be negatively impacting profitability with 35 per cent also pointing to the currency as a factor undermining their scope to plan strategically should sound alarm bells. The choice by many firms to live for the moment was after all a significant factor in creating the first wave of recessionary insolvencies witnessed during 2008 and 2009.

On reflection therefore the survey’s revelation that only 44 per cent of growing companies are actively managing currency risk is hardly shocking. This figure is significantly lower (by 13 per cent) than the proportion of their community habitually carrying out credit checks on clients. That figure in itself seems remarkably remiss on the part of a nation of owners and managers who have just ridden a storm of economic turbulence unmatched in its ferocity since 1945.

This begs a need to establish best practice for company owners and finance directors. The principles apply to importers as well as exporters. The former are all too often overlooked by the media when it comes to reporting trading issues but they remains a key component of the trading equation.

The essence of the solution is for firms to establish a risk culture whereby currency fluctuation analysis becomes an accepted part of due diligence when doing business internationally. This should certainly be the case when entry into new international markets is being considered and form part of strategic reviews of international operations whenever these are being conducted.

Currency risk management shouldn’t be seen as a ‘nice to have’. There is little value in investing time and money in such things as credit reports and retention to title clauses in customer contracts only to shoot your business in the foot by then losing out heavily on FX rates.

Internal communication channels should also be a consideration. This is particularly the case when building dialogue between finance and business development or sales teams. As a general rule, those responsible for selling products and services should be briefed fully on currency risks and issues when pushing their wares to clients and prospects. There is also value in considering how currency fluctuations may impact across the length of your supply chain.

Do your homework and determine whether your suppliers and clients may themselves be exposed to sudden swings in FX rates. Don’t hesitate to ask questions here, as spotting a problem being faced by a business partner early may save you an enormous financial headache later.

But perhaps most importantly, don’t overlook the potential benefits of adopting a long term view to managing currency risk. The FPB report again emphasised that 49 per cent of firms trade currency on a purely ad hoc basis.

Asking your currency dealer to help you build a strategy for the long term could help you avoid the vicious circle of short-termism which has come to afflict the business world.

To find out more visit www.smart-fx.net