Managing Currency Risk

Managing Currency Risk

Ed Surman, Director at Mushroombiz, interviewed John Marney of Smart Currency about moving money across borders and changing currency for Ed’s podcast, Business With The Fun Guys.  The podcast interview is available on our website, however we’ve taken the main points of Marney’s teachings and illustrate them here:

Marney discusses the benefits of having a plan in place to move money across border, what SME's should look for, and solutions that can be used to help small businesses move money around the world with ease and control.

The Risk of Currency Volatility

Businesses who have started exporting due to the drop in sterling and following the referendum, their goods have become cheaper to other countries, so in this respect exporting is definitely blossoming.  However, if you are, for example a clothing manufacturer, importing your raw materials, then you would have been paying more money for these materials in the last two years. So there is a real risk.

If you are importing raw material and then exporting back out, you have double the risk in terms of currency volatility. It's not uncommon for currencies to move 10% in a year. If you get that wrong both ways that's 20% of your margin gone. Obviously most companies would rather not experience this, but for some, they wouldn’t be able to suffer that kind of loss.

Exporting businesses may be covering contracts in foreign currencies on a reactive basis, as and when needed.  That's not necessarily bad, but it does mean being vulnerable to foreign exchange variances throughout the whole year.

The preference, if you have a fairly good idea of what your cash flows are going to be, then cover as much of it as possible at the beginning of your financial year. Forecast and plan your currency, hedge your cash flows, then it guarantees your margins.

No one knows exactly what will happen in a year’s time, so without that knowledge, the best thing to do is to be able to forecast your cash flows.  That’s the key.

Analyse Cash Flows and Set Exchange Rates in Your Budgets

Companies often analyse their cash flows and forecasts at the start of the year, so it is advised to set exchange rates in their budgets for the next year or so.  Given the current rate, those cash flows are going to return to you in that other currency.  If this is satisfactory, then the best thing to do is to hedge that situation.  You then have visibility over your cash flows, if they are reliable.

As mentioned previously, the other option is to buy foreign currency at the time you need it.  But in extreme circumstances, this can result in losing nearly all your profit for the year. We're talking about Brexit years here, the referendum year. But going forward it's going to be critical.

If you know what your cash flows are and that they're reliable, then to do nothing is effectively speculation. You know what the rate is right now and what you can guarantee in terms of revenue. Obviously there are people out there who believe that the rate may improve for them and therefore don't do anything. But of course, the rate can also worsen for them. And if it does, then your forecasted cashflows become worse. If you have reliable cash flow forecasts, the best thing you can do is to implement some kind of hedging strategy to manage that and to mitigate the risk from the currency moves as often as possible.

The Importance of Using an FCA Authorised Company

It is important when sourcing help with this to use a company who is FCA authorised.  The FCA authorisation is important because it guarantees the customer that their funds will be segregated, and they have security even, if the company helping them goes bust.

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