SMEs Trading Abroad Warned to Guard Against Sterling Fluctuations
Small firms trading overseas should sign forward contracts with clients to protect themselves against the risk of the pound falling further in value, according to foreign exchange firm Moneycorp, writes Farah Jifri.
Research from Moneycorp revealed that despite the value of the pound falling 14 per cent against the Euro over the eight months to the end of April this year, two-thirds of small firms that trade internationally did not use forward contracts in 2007.
Forward contracts provide businesses with stability by allowing them to fix an exchange rate on the day that they become aware of their requirement for future settlement. This forward planning can prevent firms incurring losses due to exchange rate movement.
“It is possible to save large sums of money through this sort of currency hedging, as securing the rate provides a level of certainty that allows businesses to plan and budget more effectively,” said Moneycorp commercial director Piers Cracknell.
Cracknell pointed out that many small firms that hedged currency have now used up their contracts and have to exchange money at current rates.
“There are still measures SMEs can take to cushion the impact of a falling pound, including shopping around for the best deals on international money transfers,” he said.
“Rather than exchanging the currency on the day the payment is due, it’s wise to plan ahead with your transactions and use an expert to help you manage your currency risk,” added Cracknell.
Economists BDO Stoy Hayward also advised small firms to plan ahead, but partner Jim Brown warned that forward contracts come with their own risks.
“Uncertainty is a problem for any business and forward contracts only work if a company has good visibility of future cash flow,” said Brown.
“Another option is to create a ‘natural hedge’, so if your income is primarily in Euros, then it is advisable to minimise some of the risk by purchasing your products in the same currency.”
Brown added that the good news for SMEs is that he believes the value of the pound is not going to get any lower.
“We believe that it will begin to strengthen in the next 12 months,” he said.