Why exporting SMEs must watch exchange rates closely
The world of finance can be a highly volatile one, with stock markets and exchange rates fluctuating on a daily basis.
For businesses that rely on these markets, keeping a close eye on events is essential as any changes could potentially impact negatively on their firm.
According to AFEX, a provider of foreign-currency management solutions, exchange rate risk is proving to be a major challenge for smaller firms across the UK.
Currency risk was named by 43% of SMEs as their biggest challenge, marking a considerable increase from the 32% who said the same when the survey was last carried out a year ago.
For businesses with interests in many different countries, currency risk occurs when costs are in a different currency to revenue, meaning profits are impacted by any fluctuations in exchange rates.
While this can be beneficial if rates are good, it can place extreme pressures on finances should rates drop very suddenly.
This also makes money management more difficult, as those in charge of finances will often have to operate without knowing any exact figures.
For instance, the pound has reached seven-year highs against the euro in the past 12 months but also five-year lows against the dollar.
While this has benefitted some companies, others have revealed that it put them under pressure, with 8% of firms suggesting volatility contributed to the closing of office space or the cutting of staffing levels.
These signs can be the first signals of more severe financial troubles for a company and any with concerns are advised to seek financial guidance from insolvency practitioners at the first opportunity.
According to AFEX, only one third of SMEs currently use hedging tools in order to mitigate exchange rate risks.
This enables a firm to fix an exchange rate with a supplier to reduce the risks involved – although this can also cause issues if rapid rate rises or declines are noted.
As markets in the UK improve, more firms are expanding their operations which in turn boosts the level of exporting that is taking place.
However, firms have been warned to watch market conditions and exchange rates to ensure they get the value deals they are looking for.
By Phil Smith
If you would like to have a free no obligation chat with one of our advisers please call us on 0207 186 1144.
View all Business Insights