SMEs lose out to currency fluctuations
Small firms importing from the US and the EU lost almost £900 million last year by failing to protect transactions from currency fluctuations, according to foreign exchange firm World First.
This year, the pound fell by nearly 20% in value against the dollar between July and October and by 7% in two days between 20 and 22 October. World First’s head of corporate foreign exchange Alex Sullivan said:
“The recent dramatic slump in the value of the pound against both the euro and the dollar now means that otherwise profitable sales can become heavily loss–making,”
“In the past, following a purchase of goods from an overseas supplier, a small company finance director may well have simply spoken to his bank and opted to exchange money due to be paid at the prevailing rate on the invoice payment date. In current markets, this is simply not enough.”
“For a lot of SMEs, this has been an area of their business that they haven’t paid much attention to until now,” he added. “Although it affected the profit levels, it wasn’t to a disastrous level, so they could build that into their pricing”.
“Now this profit can be wiped out and firms can go into a loss within a day or a week,” said Sullivan. “To protect themselves against these fluctuations, there is a product they can buy that fixes the exchange rate into the future so they can protect their firm against the rates moving down.”
According to foreign exchange business Moneycorp, SMEs should identify their exposure to exchange rate movement and ensure they have a formal policy in place to deal with it. Moneycorp commercial director Piers Cracknell said:
“I would suggest they have a balanced approach of traditional spot payments, as well as forward contracts where you can secure the rates in advance so you know exactly your budget rate for that product,”
World First’s research found that UK SMEs’ imports and exports are worth approximately £141 billion per year, but SMEs do not protect half of these transactions against currency fluctuations.
For advice on importing and the financial implications, read our guide on import finance.