Managing Currency Risk
Ed Surman, Director at Mushroom, interviewed John Marney of Smart Currency about moving money across borders and changing currency for Ed’s podcast, Business With The Fun Guys. The podcast interview is available here to listen to, however we’ve taken the main points of Marney’s teachings and illustrate them here:
Marney discusses the benefits of having a plan in place to move money across border, what SME's should look for, and solutions that can be used to help small businesses move money around the world with ease and control.
The Risk of Currency Volatility
Businesses who have started exporting due to the drop in sterling and following the referendum, their goods have become cheaper to other countries, so in this respect exporting is definitely blossoming. However, if you are, for example a clothing manufacturer, importing your raw materials, then you would have been paying more money for these materials in the last two years. So there is a real risk.
If you are importing raw material and then exporting back out, you have double the risk in terms of currency volatility. It's not uncommon for currencies to move 10% in a year. If you get that wrong both ways that's 20% of your margin gone. Obviously most companies would rather not experience this, but for some, they wouldn’t be able to suffer that kind of loss.
Exporting businesses may be covering contracts in foreign currencies on a reactive basis, as and when needed. That's not necessarily bad, but it does mean being vulnerable to foreign exchange variances throughout the whole year.
The preference, if you have a fairly good idea of what your cash flows are going to be, then cover as much of it as possible at the beginning of your financial year. Forecast and plan your currency, hedge your cash flows, then it guarantees your margins.
No one knows exactly what will happen in a year’s time, so without that knowledge, the best thing to do is to be able to forecast your cash flows. That’s the key.
Analyse Cash Flows and Set Exchange Rates in Your Budgets
Companies often analyse their cash flows and forecasts at the start of the year, so it is advised to set exchange rates in their budgets for the next year or so. Given the current rate, those cash flows are going to return to you in that other currency. If this is satisfactory, then the best thing to do is to hedge that situation. You then have visibility over your cash flows, if they are reliable.
As mentioned previously, the other option is to buy foreign currency at the time you need it. But in extreme circumstances, this can result in losing nearly all your profit for the year. We're talking about Brexit years here, the referendum year. But going forward it's going to be critical.
If you know what your cash flows are and that they're reliable, then to do nothing is effectively speculation. You know what the rate is right now and what you can guarantee in terms of revenue. Obviously there are people out there who believe that the rate may improve for them and therefore don't do anything. But of course, the rate can also worsen for them. And if it does, then your forecasted cashflows become worse. If you have reliable cash flow forecasts, the best thing you can do is to implement some kind of hedging strategy to manage that and to mitigate the risk from the currency moves as often as possible.
The Importance of Using an FCA Authorised Company
It is important when sourcing help with this to use a company who is FCA authorised. The FCA authorisation is important because it guarantees the customer that their funds will be segregated, and they have security even, if the company helping them goes bust.
Why Smart Currency?
Previously businesses went to their banks for foreign exchange but the service levels have declined recently. Many branches have closed and following 2008, there were incredibly high costs and shifts in costs that banks had to somehow assimilate into their business. As a result, many banks have cut back on the services and support that they give, especially to smaller companies.
And that's really where Smart Currency comes into the market. It's exactly that kind of guidance and support they offer, and then ultimately the ability to do that hedging through them. Smart are partners with various business services so that they can offer trade finance, invoice finance, etc. which again, help companies with working capital. If they have cashflow issues, it can help them out of those kinds of situations as well.
Does your business export and/or need to move money around? Do you set exchange rates in your budgets? If you would like to find out more about how Smart Currency could help, click here.
If you’d like some business support, in terms of accounting, book keeping or administration, please contact Mushroom by clicking here.