By Mark Bolsom, Head of the UK Trading Desk at Western Union Business Solutions,
It may have taken six years for the UK economy to recover the ground lost during the financial crisis, and with growth forecasts of 3.4 per cent of GDP for this year, it is not surprising that British businesses are chomping at the bit to capitalise on the UK’s economic recovery.
So, too, are European-based businesses. Small and medium-sized enterprises (SMEs) are increasingly internationalising and, according to a global study of over 2,000 SME executives, almost half of those surveyed expect to generate over 20 per cent of their revenues outside their home country by 2016. Now is not the time for the UK’s SMEs to get too complacent over the domestic economy and neglect their position in international markets. Despite the widespread success of Eurosceptic parties in May’s European election, Europe is still Britain’s largest trading partner, which means staying competitive in the eyes of buyers on the Continent remains an important priority to the health of the UK economy.
So, how can British SMEs remain competitive internationally? Certainly, the strength of sterling against the euro in recent months has been cause for some concern as it has the potential to create a barrier to the cost attractiveness of UK exports. There are, however, currency hedging strategies that SMEs can adopt in order to maximise their competitiveness when trading abroad.
Cost management is one of the biggest challenges that SMEs have to contend with when working in an overseas market, especially when faced with volatile currency rates. Disturbingly, our recent research revealed that nearly half of UK SMEs take no steps at all to protect their businesses from fluctuating exchange rates, which translates to a loss of control over pricing and uncertain budgets. A sudden shift in exchange rates and a profitable deal can quickly lose value, and even make a loss in some cases. Even small rate changes can have huge ramifications on revenue streams for many British importers and exporters operating on tight margins. With both the recent European Central Bank action and the People’s Bank of China set to announce key monetary policy in the coming weeks, economists are anticipating an increase in currency volatility over the summer months.
Many corporate treasurers would therefore do well to consider utilising a forward contract or future payment, and look at whether buying or selling a foreign currency at today’s market price is right for them. Both these products allow companies to fix the exchange rates of their overseas payments, which means that they will be in a better position to manage their costs and will therefore be more adequately equipped to cope with unforeseen market volatility. Businesses need sustainable cash flow and working capital in order to compete, especially when they work across borders. International SMEs that take control of their overseas transactions can ensure their competitiveness, maximize their cash flow and, importantly, ensure their margins are protected. By looking at a company’s overall exposure to FX volatility, it is possible to determine the correct proportion of the business that needs to be hedged. This will lead to a more stable cash flow, increasing overall efficiency and ensuring that the business can price at a secured rate.
Foreign exchange hedging is often seen as a complicated cash management strategy for businesses to consider when it is in fact a tool that provides much increased visibility. Businesses should realise that a healthy cash flow will go a long way towards influencing whether or not that business will thrive. More must be done to educate SMEs about how simple it is to control their exposures to overseas markets in order to capitalise on global growth opportunities.
Western Union Business Solutions is a global financial services provider that enables companies of all sizes to send and receive international payments and manage global cash flow, creating unique solutions tailored to meet their individual needs. It is a business unit of the Western Union Company (NYSE: WU), a leading nonbank provider of cross border payments, and operates services through locally licensed affiliates in over 30 countries. Clients are supported by a network of trading offices, strategic banking relationships and a global clearing network and can send cross-border foreign exchange payments in more than 135 currencies.
About Western Union
The Western Union Company (NYSE: WU) is a leader in global payment services. Together with its Vigo, Orlandi Valuta, Pago Facil and Western Union Business Solutions branded payment services, Western Union provides consumers and businesses with fast, reliable and convenient ways to send and receive money around the world, to send payments and to purchase money orders. As of March 31, 2014, the Western Union, Vigo and Orlandi Valuta branded services were offered through a combined network of over 500,000 agent locations in 200 countries and territories and over 100,000 ATMs. In 2013, The Western Union Company completed 242 million consumer-to-consumer transactions worldwide, moving $82 billion of principal between consumers, and 459 million business payments. For more information, visit www.westernunion.com.