Top tips to manage foreign exchange risk
On Tuesday 3rd November, The British Chambers of Commerce (BCC), a moneycorp partner, will be hosting the 2015 International Trade Conference in London. Andy Reid, Managing Director of Global Payments at moneycorp will be addressing delegates about how the BCC and moneycorp are working together to help SMEs realise their international trade potential.
High growth international markets offer British businesses the chance to trade on the world stage. Although the rewards can be great, businesses can face challenges when managing overseas trading. One of the main issues often overlooked is managing foreign exchange risk. Even small rate fluctuations can have implications for businesses that trade internationally, particularly when dealing in large volumes.
Andy Reid offers some top tips below on how to manage foreign exchange risk.
- Plan for risk
Planning is the first step to managing your foreign exchange (FX) risk. Agreeing on a budgeted exchange rate for the year will guide your transactions. Your budgeted rate should take into account the volume and timing of your expected transactions, as well as a realistic assumption of current and future rates. An FX specialist can help to define this rate by analysing past trends. Planning ahead will help protect your business from foreign exchange risk and enable you to benefit from any exchange rate movements, which are in your favour. This could make a huge difference to your bottom line.
- Understand your business objectives
Your business objectives play an important role in defining an FX policy and it is important to know what degree of risk your company is willing to take and how much your FX exposure could impact on your business objectives.
- Understand the state of the target currency market
Before you start exporting, consider the current state of the currency market you’re looking to enter. Currencies around the world may be affected by many factors – being moved by elements such as supply and demand, economic growth, interest rates and politics. Because of this, it is vital to have a solid understanding of the currency market you’re entering, its history, and the factors that may affect its future. From this, you can develop a strategy to best manage your investment risk.
- Consider the strength of the pound
If you are an importer, a strong pound tends to be good news for business. On the other hand, for an exporting business, a stronger sterling can make a product or service more expensive in an overseas market, or it can reduce the margins a business is able to take home when selling its product or service abroad.
- Develop a foreign exchange policy and review it regularly
It is important that your policy complies with and works towards overall strategy and objectives. Once agreed, a policy should be reviewed regularly and be flexible enough to reflect the constantly changing nature of the markets.
- Get help to put together a strategy
For those starting out their exporting endeavours, we would always suggest seeking support from a foreign exchange specialist to ensure you get off on the right foot. By consulting an expert you will be able to talk through any concerns you may have, along with areas of potential risk within your export plan.
- Don’t be tempted to gamble on the FX markets
While it’s tempting to take a punt on the markets, abandoning your FX policy can increase your risk - extreme movements in the markets can catch you out.
- Investigate payment service options
Often, a foreign exchange transaction is just half of the task of managing international invoices. The time taken to process payments each month can add up and detract from other business activities. Your business could benefit from an online system which simplifies payments, automatically checks banking details and stored details for future use.
- Manage your business relationships
Tracking payments through the authorisation process is important in maintaining good supplier relationships. Look for payment tracking services, so your suppliers can be emailed automatically when a payment has been sent. In challenging times, key supplier relationships can be hugely important to your business.
- Communicate and review
Reporting clarity enables your business to ensure it’s adhering to its foreign exchange policy and making the most of movements in the markets. It’s best to choose a system which will have access to sophisticated reporting tools, enabling you to keep track of deals, payments and the progress of your chosen strategy.