There is an ancient Chinese curse, “May you live in interesting times.” British businesses have been feeling the full weight of this curse in 2018 as the Brexit debate rumbles on and still no clear picture is emerging. Even if the government does stick to the March 29 deadline, there are more interesting times ahead as businesses learn to navigate the uncharted waters of the transition period and a UK independent from the EU.
Cath Kidston sees losses due to weak pound
Alongside the logistical challenges, many businesses are feeling the impact of a weakened pound in global markets. The pound is likely to remain volatile at least as long as the picture remains uncertain. A sudden drop in the pound, as a result of bad news over the deal or perhaps a change in the political picture, can have a major impact on profits. Figures reported from retailer Cath Kidston demonstrate the scope of those losses. Despite taking measures to offset wider economic factors and an increase of 1.2% in sales, the weak pound meant the brand made an EBITDA loss of £10.5 million, up from an £8.4 million loss in 2017.
Global businesses face multiple challenges
The numbers are dramatic because of the scale of the Cath Kidston operation and it was not all bad news for the retailer, which reported growth both in the domestic market and in Japan. However, it’s clear that the weak pound had a significant role to play in the erosion of profits. While a weak pound may make British exports attractive to overseas markets, the cost of imports has risen by the same amount. Furthermore, a weak pound can’t be relied upon because the pound will move wherever the wind is blowing, so businesses need to do more than simply hoping the pound remains weak. A strong brand, high quality products and services and good business relationships all have a role to play in maintaining a presence abroad.
Good relationships start with good service support
We work with businesses across the UK to help them operate on a global scale. Our international payments account allows for payments in multiple currencies with a comprehensive online dashboard for real-time information. Ensuring that people are paid on time can go a long way to maintaining good relationships and with functionality to send payment confirmations, that good communication is another way to forge stronger bonds.
Mitigating the risk of currency transactions
The key issue, however, is the risk inherent in currency transactions. Currency markets always fluctuate and Brexit has brought the issue into sharp focus for many British businesses. The sudden drop immediately after the referendum caught out many businesses who were unprepared for the dramatic change in the value of the pound. Even two years on, the shadow of Brexit looms large and will continue to do so. This is leaving a large hole in the profits of many companies but there are many ways to make sure that you’re not making avoidable losses. High street banks often charge higher fees and offer less preferential rates than a specialist. You may think it’s only £10 here or there on fees, or a difference of a couple of hundred pounds on an overseas order but over the course of a year that makes a big difference on the balance sheet. Particularly at a time when the pound is so volatile, it’s important to get the best value from every transaction.
Understanding currency fluctuations
Brexit isn’t the only issue to watch. The pound moves in relation to other currencies, so for example if the US dollar continues to strengthen into next year, good news on the Brexit front may not be enough to see sterling make any gains. We offer all our clients expert guidance on the currency market which can help with understanding current trends and potential changes to the market over the year to ensure that your foreign exchange plans and strategy remain fit for purpose in a rapidly evolving market.
Track and target specific exchange rates
We also provide our clients with access to a number of tools to mitigate some of the risk of currency fluctuations. For example, it’s possible to track and even target specific rates so that you exchange currency when you’re likely to get the best value. A market order allows you to specify a rate and the transaction takes place if that rate is reached. You can also set up a limit order in tandem with your market order; this specifies the lowest rate that you find acceptable and may protect your bottom line from further losses. In this way, while it’s not possible to guarantee a rate, you’re operating within a specific margin which allows for a certain amount of loss.
Certainty in uncertain times
If you prefer a greater measure of certainty, perhaps to fix prices for the year and accurately forecast budgets, then there is always the option of a forward contract. (Please note a forward contract may require a deposit.) This tool allows you to fix a prevailing rate of exchange for up to two years. Of course, we might all get the good news on Brexit we’re hoping for and the pound could go up as well as down, but it does provide greater certainty. If you want to build good relationships through accurate, consistent pricing and run your business based on definite forecasts, this might be the way to go.
Currency specialists can help with international business challenges
Many of our clients use the full portfolio of tools at their disposal to manage their currency risk. For example, a portion of their currency outgoings may be fixed with a forward contract, with the rest allocated either to market orders or exchanged based on market guidance and rate notifications when the market is in their favour. It’s clear that whatever lies ahead for 2019, we will all be living in interesting times. The trick to making the most of the opportunities that such times can present is to make sure you have the right support available and understand the tools at your disposal to keep your business profitable throughout 2019 and beyond.