There is a lot to think about when starting a small business. Between securing start-up capital and customers, exchange rates are probably the last thing on your mind. But it’s not just large businesses that need to keep an eye on currency exchange rates. Fluctuations in the currency markets can have an impact on a number of areas, regardless of what business sector you operate in and Brexit has only perpetuated this.
Some businesses are particularly vulnerable to fluctuations in the forex markets. Companies that pay in advance for goods and services bought abroad can easily see their profits wiped out by a poor exchange rate. The travel industry is a good example of this, as they fix prices with suppliers in advance of receiving payment, so if the pound falls in value, they lose out.
Overseas Trading
Any business trading overseas is vulnerable to currency fluctuations and 2016 has been a particularly bad year. The EU referendum result sent shockwaves around the world and Sterling slumped to a 31-year low overnight. Since then, the pound has continued to recover in value, but it still remains weak against the USD. Some analysts are confident the pound will recover as negotiations between the UK and the EU continue, but what this pattern shows is that major political events can have a big effect on the world’s currency markets.
Volatile Trading Conditions in 2016
The volatility of the currency markets in 2016 made life very difficult for UK businesses, in particular those trading in the international market. A weak pound raises costs for businesses importing raw materials, goods and services. This has an effect on the bottom line, causing many businesses to pass on their increased costs to customers.
On the other side of the coin, exporters have enjoyed more favourable trading conditions, as their products are cheaper in the overseas market. The same applies to any businesses that locked in favourable currency rates before the EU referendum vote.
Looking ahead, it is likely that we are in for a bumpy ride. Brexit negotiations are still in the early stages and Theresa May has yet to trigger Article 50. Once this happens, we may see further volatility in the pound.
The Euro is also not immune to political and economic events. France is gearing up for a presidential election, which will have a major impact on the Euro and European Economic Community as a whole. In the US, the dollar is strong following Donald Trump’s election, but inflation there is also rising and the Federal Reserve has not ruled out the possibility of raising interest rates, which could affect the USD. Investment opportunities such as Gold, commodities or ETFs are of course always popular in uncertain times but for small businesses this is an unwanted side effect of political and economic uncertainty.
Conduct a Risk Assessment
It is very important that all businesses analyse their exposure to the foreign currency markets. Conduct a risk assessment to see how exchange rates will affect you should there be any sudden movements in the forex markets.
Look at your supply chain. If you deal with global partners, you are more vulnerable to currency movements, but even if you don’t your supply chain could still be affected.
Have a Currency Strategy in Place
Have a currency strategy in place to help you deal with any major fluctuations. Can you lock in favourable rates on or delay orders until the pound moves in the right direction? Keep a watch on news events, as major political announcements will cause ripples on the forex market.
Knowledge is power, so have a strong currency strategy in place and your business will be in a better position to negotiate 2017.
