But now is also when businesses, and individuals, should be preparing for Brexit. In less than 100 days, the UK will leave the EU, and it is crucial to understand how currency risk during this turbulent process could play a part in ultimately the revenue and profit margins of your business.
Check your risk
If you buy or sell goods or services from companies based abroad, you are exposed to currency risk, in a nutshell. Where you purchase supplies from for example, to how often you do business internationally, can all add to different points of risk. So the first action as a business looking to understand its risk exposure is to identify where the risk is coming from.
It can be simple, such as looking into how you are quoted or invoiced. Some overseas companies may do this in their local currency, and add a margin to protect themselves from currency fluctuations, which in turn impacts your pricing and therefore your bottom line. Resource costs for administering multi-currency operations, such as you having offices across different nations can also be an additional squeeze on margins with added layers of complexity.
Highlighted particularly during the pandemic was the pressure on international supply chains, where some collapsed as lockdowns came into play. Businesses need to be looking at their supply chains, especially those within the EU because of Brexit, and how they may be affected by highs and lows between sterling and the euro.
Navigate the risk
Now you have identified the potential areas of risk, you can start to understand the various ways you can navigate through currency market fluctuations and protect yourself from volatility. From changing suppliers due to uncertainty within that market, to changing how you quote and invoice, there are plenty of options. One way to work through risk is to look at the tools at your disposal, and decide which ones may fit your needs. If you have been managing international payments on an ad-hoc basis and want to continue to do so, a spot contract means you receive the exchange rate on the day you trade funds.
However, this presents a high risk because of the unpredictable nature of the FX markets. For more budget certainty, a forward contract allows you to fix a prevailing exchange rate for a set period of time (it may require a deposit). While the rate may go up, or down, you will receive the fixed rate, allowing for clear margins and could suit a business who accurately forecast overseas costs.
Learn about currency risk
Consider all of the government advice and be mindful of initiatives that have been made available to help navigate these choppy waters. Use information to consider the current state of the market you are entering or already in. Factors such as economic growth, interest rates, politics, Covid-19 and Brexit can all play a big part in how much your money is worth.
If you are an importer for example, a strong pound tends to be good news, but if you are an exporting business, a stronger sterling can make a product or service more expensive overseas, or it could reduce margins a business is able to take home.
From daily news updates straight into your inbox, to expert FX dealers over the phone, we can help you develop a strategy with a focused toolkit to help you manage your business overseas. Telephone +44 (0) 207 823 7800 or email firstname.lastname@example.org