How do exchange rates affect businesses?

How do exchange rates affect businesses?

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With many UK businesses at the mercy of currency volatility caused by the Covid-19 pandemic and the ongoing Brexit negotiations, many are finding it difficult to predict a financial outcome.

Exchange rates have an impact on budgets, logistics, cashflow, revenue and even international business relations. Although fluctuating currency values will always carry a degree of unpredictability, understanding the effect it can have on business initiatives and operations at a granular level can help mitigate significant risk and loss.  

 

High export sales volumes, low profitability

Fluctuating currency values present significant risk for the exporting of goods. The fast-moving market can force businesses to sell at a loss or could price them out of the market entirely. A strong pound also poses the potential for products or services to become more expensive to overseas buyers.

A hedging strategy could provide protection against an adverse market. This is done using forward contracts, which give you the option to secure a current rate for future overseas payments (this may require a deposit). In some cases, a favourable rate can be secured for up to two years, providing the stability needed for effective budgeting.

 

Unpredictable supply chain expenses

Constantly-moving exchange rates will inevitably cause supply chain expenses to shift, especially when using external logistics providers. Costs can stack up across multiple currencies depending on the location of goods or the type of supply chain being used. The complexity of managing these payments could put a strain on relationships with clients, distributors or suppliers.

To help manage this, businesses can choose to exchange immediately using a spot contract. This is particularly useful when the exchange rate moves in your favour and an ad-hoc, urgent overseas payment is needed. Although there’s no guarantee the target rate will be reached, it does give a more accurate picture of the costs and currency exposure of the payment. Some of the complexity of the process can be managed with the right FX software. This allows payments to be scheduled and automated across multiple currencies, all from one hub.

 

Inflated import prices

It’s not uncommon for overseas suppliers to add a margin to the cost of goods, causing import costs to soar and your own prices to go up. Businesses also face the risk of the market moving against them between the process of receiving a quote and paying the final invoice.

If a supplier has longer payment terms on invoicing, businesses can attempt to manage currency changes using a market order. Because it allows you to automatically trigger the trade if your desired rate is achieved, your currency exposure is limited. If the pound should trend downward, a stop loss order can be used to prevent further losses. This can also be used for large future orders which have the potential to damage your financial standing significantly in the event of an unfavourable market shift.

 

A plunge in overseas office profitability

Localised sales teams overseas can be incredibly advantageous for operating within international markets, but the profitability of these offices can be impacted by market downturns. The resourcing costs of multi-currency payment administration can erode your margin and increase your risk, as can payroll and the cost of running the office.

Going direct to a foreign exchange specialist will usually give you access to much better rates, as well as the option of using a forward contract to stabilise your operational costs. You could also automate payments, reducing time spent arranging regular payments manually.

 

Businesses can potentially shield themselves from the effects of changing exchange rates by working with a currency specialist to develop a risk strategy and leverage expert tools and knowledge. Get in touch today and find out how we can help.

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