Q. How serious a problem are currency movements for my business?
A.Currency fluctuations are obviously only a problem for British businesses that buy or sell in currencies other than sterling. But for those companies, it can make the difference between making a profit or a loss. The euro, for example, has fallen nearly 10 per cent against the pound since early March – great if you’re importing French wines, but potentially disastrous if you’re selling car engines to German dealers. Either way, the current volatile state of the currency markets can make it difficult for businesses to negotiate deals with confidence and draw up a tight budget. Christina Weisz of Currency Solutions says: “It’s an incredibly competitive market and profit margins are being squeezed. If you go to the ends of Earth to source the cheapest produces possible and haggle over 5 per cent but ignore your currency exposure, it can wipe out a profit.” Despite this risk, many small and medium-sized firms are failing to factor this uncertainty into their business plans. Instead of actively preparing for foreign exchange movements, they simply buy or sell currency as and when they need it on the day, often via a high street bank. While using your usual bank might seem convenient, it often means you are not getting the best rate available. But worse, you simply have to take whatever rates are available on the day, which could throw any carefully calculated margins into chaos.
Q. So how can I?plan for this volatility in the foreign exchange markets?
A.One of the easiest ways to plan for currency shifts is to use a currency broker to trade forex instead of your regular bank. Brokers cannot protect you from the fundamental trends of the forex market overall, but they can introduce exchange rate certainty into your balance sheet to ensure that you can plan in advance. At most brokers, a company (or an individual making a big purchase or sale abroad) is assigned a currency advisor who will pass on information about where the markets might go and, more importantly, help you decide whether to lock in the current exchange rate on any given deal or currency requirement and supply a contract to do so. So for example, if a wine dealer knows she is likely to need €100,000 in the year ahead, she can agree a rate with her broker who will buy the whole lot at the start of the year and sell it to her at the agreed rate as her need arises. While the dealer might end up losing out on potential extra profit if the euro plummets further, it is often worth the certainty of being able to budget a precise forex cost.
Alternatively, some brokers enable you to enter into floating contracts if you think exchange rates might move in your favour. Stephen Hughes of Foreign Currency Direct says it’s mainly about being aware of the issue: “By having a continued conversation about it, leaving it open, you’re permanently aware of how much it’s going to cost. During the recession we’ve noticed people are taking the extra time to find the extra 1-2 per cent where they can save money.” Another advantage of brokers is that they get better rates because they are trading currencies in bulk with foreign organisations with whom they have a relationship. They do take a profit from the spread, but it will usually be a significantly tighter spread than you would get at your bank.