Managing Currencies in a Volatile Market
When the economic climate is operating in an uncertain way, the Foreign Exchange movements can make or break some businesses, particularly SMEs. Without a properly thought out and managed risk strategy, business will suffer. Colin Mills, founder and CEO of The FD Centre explains what businesses can do to manage these risks.
“In the final quarter of 2008, Sterling depreciated by roughly 19% (from 1.85 to 1.50) against the US Dollar, and by 17% (from 1.26 to 1.05) against the Euro. Since then, the pound has regained 10% against both currencies. Even last month (August), Sterling/Dollar traded within a significant 10 cent range (1.61-1.71). For businesses involved in international trade, this volatility can seriously impact profitability if not effectively managed. In particular many retailers and wholesalers saw their business profits become losses overnight.”
Colin continues “Many large companies have treasury teams that deal with this exposure. SMEs frequently do not have the skills, experience or resources to do this. The jargon used by the sector is incomprehensible to most SME entrepreneurs and, as a result, they often decide to do nothing out of ignorance rather than as a deliberate strategy.”
Every type of business has their specific set of objectives associated with their foreign exchange activity. For example, UK exporters may issue Sterling invoices or be pressured to quote in other currencies. It’s therefore important they will need to safeguard the Sterling value of the goods. Importers almost certainly have foreign currency exposure and, depending on the competitive landscape and nature of the commercial transaction, need to balance price protection with participation in favourable currency fluctuations, to either take extra profit or pass on savings.
For an assessment on your businesses strategy for managing foreign exchange activity, the message is clear – take professional advice. If this advice is not available within your own business there are many professional who can help. The FD Centre is the largest provider of part time Finance Directors in the UK. Their team of highly experienced FDs can offer your business the advice it needs to maintain its longer term strategy. Visit www.thefdcentre.co.uk for more information.