Exchange rates are notoriously volatile, with micro changes and peaks and troughs for major currency pairs occurring almost every day based on geopolitical news and other factors. These fluctuations expose businesses to currency risk, which can affect capital expenditure, tax obligations, default risk and liquidity amongst other areas.
Profit impact
If your company trades abroad, then you will be exposed to the ups and downs of currency exchange rates. Forecasting profits and sales for each quarter and fiscal year is difficult enough already, but exchange rates can complicate matters, especially when you have sales listed in a different currency from GBP. What may have initially appeared to be a strong ‘beat’ can flip the other way if the exchange rate goes against you.
Companies can attempt to mitigate some of these risks by investing in forex. Using automated trading programs and advanced software with algorithms can make it easier to get profitable deals when you need them the most. Taking a closer look at the services of each broker is recommended if you go down this route, so always conduct due diligence – read AvaTrade reviews.
Supplier payments
Dealing with clients around the world often means paying for shipments in another currency, which leads to something called exchange rate exposure. If you have contracted to pay €25,000 to a supplier in France or Germany in three months’ time, then the EUR/GBP exchange rate could make this deal more or less expensive depending on how the market moves.
Currency volatility can also have an impact on your ability to buy imports, as a weaker pound, for example, will mean that you have less money to purchase goods from mainland Europe or from other suppliers around the world. Higher import costs can be a drag on growth.
Balance sheet hedging
Having a mix of holding assets and liabilities in different currencies is common for larger companies. This makes it difficult to maintain balance sheets as sharp revisions are often needed when foreign exchange fluctuates. Your sterling-based balance sheet can, for example, take a hit if you have a loan in an emerging market.
Balance sheet hedging reduces these risks by using financial instruments such as a forward contract to fix rates in place for a future date so that the market does not dictate the final due price. While this offers stability, you may then miss out on an improving exchange rate. These decisions have to be carefully balanced.
Reducing risk
Forward contracts are among the tools that can reduce exchange rate exposure. You could also put a clause in a contract for prices to be negotiated further down the line if currencies are particularly volatile within a certain period of time. Transferring money overseas also brings with it transaction fees and other charges. A spot transaction involving a broker is a simple and secure way to move money in a chosen currency.
While exchange rates are unlikely to make or break a deal or be the difference between a profit and a loss, being vigilant about and managing these fluctuations will put your business in a better position to conclude deals and forecast sales effectively.