UK businesses at risk to volatile currency markets
Many UK SMEs are failing to protect themselves against fluctuations in the currency markets, according to a new report from Reuters.
The report, based on figures by banking research consultancy East & Partners, shows that the majority of larger businesses engaging in international business do use hedging strategies to reduce their exposure to currency fluctuations.
Between 80% and 90% of businesses with a turnover in excess of £20 million use either option or forward contracts, which can help mitigate the effects of currency fluctuations. Less than a quarter of UK businesses with a turnover of less than £20 million do the same however.
The number of smaller businesses hedging their exposure is steadily rising but many are still at risk, especially during volatile times in the FX markets.
Sterling, for example, has experienced significant volatility over the past year or so, hitting a seven-year high against the euro and a five-year low against the dollar in the same period. Businesses relying on spot market rate may find that the cost of a contract with foreign suppliers, or the profit reaped from international sales, could vary considerably depending on exchange rates.
This in turn means that future payments or revenues can differ widely from those written into a company’s annual budget. For businesses operating on tight margins, this could cause serious difficulties and could even result in a business requiring corporate recovery. Those with financial concerns should seek advice from insolvency practitioners at the first opportunity to minimise any negative impacts on the business.
A survey published last August by AFEX revealed that currency risk was seen as the most significant challenge faced by firms when it came to conducting business internationally – the same levels of market volatility still exist six months later, meaning the situation is unlikely to have significantly improved. 43% cited currency risk as the main challenge to international trade, an increase from 32% who ranked it the top issue in 2014.
The next biggest worries were finding the right suppliers/customers (31%) and making/receiving payments (13%). Around a quarter (26%) of firms in that survey said they intended to pass on their currency risk to suppliers or customers by demanding that payments were made in sterling.
By Phil Smith