How to hedge currency risk as an SME

How to hedge currency risk as an SME

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Fluctuations in the currency market may pose a risk to the bottom line for SMEs

According to government statistics, there were 5.7 million SMEs in the UK in 2018, accounting for over 99% of all businesses. Many of those export overseas, import components for manufacture and employ staff from across the world.

Nearly half of all British exports are sent to EU member countries, a fifth to Asian countries and 15.2% of goods were shipped to North America. In fact, British exports are found right across the world, from Australia to Africa and everywhere in between. This means that a significant number of SMEs are exposed to currency risk due to fluctuations in the foreign exchange market.

A weaker pound can be great news for exporters because it offers overseas buyers great value, but it makes imports more expensive. The challenge is that the constant fluctuations make it difficult to accurately predict pricing, which can squeeze profit margins.

 

Understanding the nature of your currency exposure

Take a look at how much of your revenue and costs are in currency. For example, are your exports running the risk of pricing yourself out of the market if the pound recovers? Would they lose your profit margin if it falls? Or, is there perhaps a balance of both?

If only 10% of your business relies on currency, you may think you have less to worry about than if it’s currently 70% but the issue isn’t quite that simple. Of course, a company with higher currency exposure bears more risk due to currency fluctuations, but you have to look beyond the numbers at your strategic plans. In trying economic times, whatever the percentage of your overall profits and losses are consumed by currency, you should aim to make the most of every penny.

 

How to hedge currency risk with forward contracts

There are a number of currency tools which can help you make the most of your company’s resources and still expand into further overseas markets. A forward contract allows you to lock in a prevailing rate of exchange for a set period of time. (Please note, a forward contract may require a deposit.) This can help with forward planning and provide some certainty but it carries its own risk. Currency can go up as well as down, and it depends on what is going to work best for you. In addition, there’s the fact that this works best when you have a clear pipeline. If you have definite commitments then a forward contract may be the best approach.

 

Currency tools to help you manage the impact of market volatility

A forward contract isn’t the only option for SMEs. A market order allows you to specify your target rate and the funds are transferred if that rate is reached. There are no guarantees with a market order but you can pair this with a stop-loss order which specifies the lowest limit you are willing to accept. This allows you to protect your profit margin while also having the opportunity to take advantage of movements in the market.

Like the forward contract, this is a longer term strategy that requires some planning, but if you operate a more agile business, you may feel like the best approach is to wait and see what the market brings and adapt accordingly. This does carry some risk, but if you work with a specialist who can keep you updated on the latest changes in the market then it could allow you to maximise your profit margin and still protect against too severe losses.

 

Currency support for SMEs

We work with SMEs across the UK to provide expert currency services to help them hedge their currency risk. As currency specialists, moneycorp help companies manage their risk and currency transfer requirements for imports and exports as well as international offices, international payroll and a white label platform for ecommerce multi-currency transactions.

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