Managing FX Risk for SMEs
SMEs in the UK have experienced an unprecedented level of change over the past three years. Taking hits from the UK’s exit from the EU (BREXIT), and the Covid-19 pandemic, which both led to supply chain disruption, loss of income, disrupted trading, and even business closures.
Although many are fast recovering in a post covid world, there are still challenges for most SME businesses who wish to grow their business regionally and internationally.
Rising inflation, increases in cost of living and the war in Ukraine are all putting financial pressure on businesses and the impact on individuals will have a more exaggerated effect as households have less disposable income to spend on goods and services. During times like these, managing risk and reducing costs is crucial.
Unexpected volatility in foreign exchange markets can wipe out profit margins and dramatically increase costs when it comes to managing budgets abroad if they are not accounted for correctly. SMEs can be particularly exposed to this when managing the cost of importing and exporting their goods and services, hiring staff in different countries, and managing monthly invoices. It is therefore imperative that you take the right precautions as a business owner to protect your income and future trading forecasts.
This short guide from Currency UK will provide you with top tips on how you can reduce your risks significantly when managing foreign exchange in your business.
Identify your risk exposure:
When receiving payments from other countries, it is important to understand a range of different factors to assess how big the risk can be. Some factors to consider are the currency pairs you are dealing with, why you require foreign exchange and how often you plan to make foreign exchange payments.
Measure your risk exposure:
It is important to understand how an undesirable rate can impact your profitability. A good practice here is also to look at any future events that are likely to influence the currencies you deal with.
Understand all your options:
When dealing with foreign exchange risk, there are a number of different safety measures you can implement to protect you and your business.
Some of these services can include:
Spot contract: this is hedging in a favourable foreign exchange rate will be used for immediate delivery.
Forward contract: this is an agreement that allows you to take advantage of a favourable rate for a future date.
Market orders: These tools give you the autonomy to decide on rates you wish to receive or the minimum rate you are willing to accept. Once this is hit you will then automatically receive this rate.
It is crucial for SMEs to understand how exchange rates can impact profits and having a foreign exchange expert by your side to take care of your international payments can be a huge plus.
If you have any questions or would like further support regarding foreign exchange risk management, please feel free to reach out to us on +44 (0) 20 7738 0777.