How SMEs can weather political headwinds
Wherever you stand on the issue of Brexit, there’s no question that it’ll mean uncertainty. Uncertainty not just in local economic terms, but in terms of the impact it will have on your supply chain and income streams as the Sterling gets caught in the crossfire of the UK’s political turmoil.
We’ve already seen this volatility play out over the last few months. The Pound has been strapped into a veritable rollercoaster ride in recent weeks as the markets struggle to understand what the game of political ping pong taking place in Parliament actually means for UK businesses in real terms.
This turbulence is troubling for multinationals, but for SMEs, it can be considerably worse. If you’re a business that has to deal with foreign currencies in any regard, fluctuating currency can have a material impact on the cash coming into your company.
Despite a General Election having now been set, the need for stability has never been greater. CFOs are best positioned to navigate these choppy waters by brokering discussion on procurement and supply chain risks, because of their clear view of all relevant departments. Here are ways that CFOs can weather these political headwinds by inhabiting the mindset of the FX broker more.
Absorbing the hit
One of the prevailing questions for CFOs is whether they take the hit from an adverse currency swing or do they pass it along to customers. The question clearly differs depending on the sector you operate in – fruit and veg distributors, like Ivan Wood, need access to live reporting to judge whether an FX swing means they pass the cost onto their customers. Businesses outside of the ultra-fast frenetic FMCG sector work differently. Luxury leather good manufacturer Tusting imports raw leather from India and operates thriving sales markets in US, UK and Japan. As they use a variety of different currencies and will have some natural hedges, the judgement on when (or if) to pass on a particularly adverse swing in currency will likely be made over a much longer time period.
Managing supply chain temperamentality
One of the many risks that accompany the global nature of supply chains is the challenge of currency fluctuation. Foreign exchange rates can vary wildly over the course of a supply chain agreement, and these have to be considered up front. It’s worth noting that however clever your contracts are, large jumps will eventually catch up with your pricing.
Brexit, whether deal or no-deal, will likely act as a catalyst for such a leap. A no deal Brexit, for example, could see considerable devaluation of the Sterling against the Euro and other currencies, which could wreak havoc on procurement costs and previously well-established supply chain deals. To get ahead of this, it’s important that CFOs map each of these risk scenarios – whether deal, no deal or a last minute decision to remain – against their existing supply chain agreements. This might mean working to negotiate different terms that hedge your risk, or finding alternative suppliers in some cases.
Hedging against exchange rate risk
With fluctuations leading to the risk of increased purchase prices and decreased selling prices, it’s important that CFOs always have a hedging strategy in place. Nearly two thirds of UK SMEs avoid exchange rate hedging due to perceptions about its complexity, but these fears over their difficulty are often unfounded. Many small businesses manage their FX risk with forward contracts, which are commitments to buy or sell currencies at an agreed rate in the future – meaning they are sheltered from any drastic swings in the fortune of the currency.
Forward contracts do however prevent SMEs from benefitting from currency movements to their benefit. In these cases, CFOs might want to use stop-loss orders, which trigger a purchase when their chosen currency falls beyond a certain point. Then again, our CFO might want to combine these two options with a forex swap – reducing the degree of uncertainty but also meaning they don’t lose out if currency starts moving in their favour.
The most agile SMEs will combine use of these technical instruments with canny intuition. Guy Atkins, the Managing Director at Jo Bird, makes use of the insight derived from platforms like our own while also keeping a close eye on how the FX markets are reacting to notable news events; “I daily look at the Brexit news and then look at the FX data for favourable opportunities for selling any spare euros that we may have, and to spot any trends.”
As a manufacturer of lifesaving and fire safety equipment storage, Jo Bird has a significant export market. This means that often the business will be holding large Euro or USD balances from sales in Europe and the United States, while it needs Sterling for day-to-day running costs. Juggling this combination of income streams requires a good understanding of how to manipulate forex flows and protect against volatility. As Atkins adds: “We have managed to create a natural hedge in dollars as we both buy and sell in USD.” Stepping into the mindset of an FX broker in this way can help businesses weather even the most tumultuous of economic periods.
Harry Mowat is the Managing Director of Greentree ERP and can be reached at: [email protected]