In recent times, exchange rates have been particularly unstable, due to the Brexit vote and the election of Donald Trump. Financial instability is not good news for any business, even if they are not trading overseas, but small businesses feel the impact of global currency instability most noticeably.
Companies which trade abroad are vulnerable to changes in currency and exchange rates. It can be difficult for businesses to predict their earnings. If a business predicts it is set to earn a set amount each year, this could significantly increase or decrease depending on the exchange rate.
The impact of Brexit on small businesses is not yet fully known, but global fluctuations in currency can make it difficult for small businesses to establish new deals and contracts. The changing nature of the exchange rate can mean that an agreement that sounds like a good deal in one month may quickly put the business in a bad financial situation the next month.
To avoid being caught out many small business owners are reluctant to agree on figures when making deals, which puts them at a disadvantage. Some businesses are beginning to use automated trading programs to invest in currency on Forex to ensure that they get the most profitable deals.
Exports and imports
The declining value of your currency can have a positive impact for small businesses- you may notice an increase in sales worldwide. This is because customers may find that their money converts to be worth more of your currency, meaning they can buy more products for the same amount. So you could find that your exports increase as currency declines. Mobile trading is becoming increasingly popular because it is convenient and allows you to receive the latest updates wherever you are.
Imports can be impacted negatively if you are exchanging currency to complete the transactions. If your currency, for example, the pound, is in decline but you are paying your suppliers in the same currency you won’t encounter additional costs, as no money is being converted. However, you may find that your budget is limited and you can buy less from suppliers in a period where the currency is in decline.
Avoiding foreign transaction fees
Even if an exchange rate is favourable, it’s still common for small businesses to unknowingly overpay when making an international payment. This is because traditional providers such as banks can inflate exchange rates, and take the hidden markup as a fee.
Fortunately there are now companies that focus on making it cheaper for small businesses to work across currencies. The money transfer specialist TransferWise offers a free multi-currency account that lets businesses hold over 40 currencies, and switch between them using the mid-market exchange rate to make payments. Not only are they FCA regulated and used by over 3 million customers worldwide, they could be up to eight times cheaper than your bank.
Communication and preparation
Small businesses are less able to deal with unstable market conditions than larger businesses. This is because they often lack the back-up finances to enable them to manage through periods of decline.
Unfortunately, there is nothing to be done to prevent fluctuating currency rates but effective planning and communication can help to reduce the impact on your small business. Keep conversations with suppliers open and create a plan for financial instability. Most companies will opt to monitor the changes on a regular basis.
Some businesses are taking to hedging to reduce the financial risks that come with fluctuating global currencies. Hedging involves negotiating a deal which will protect the business from any possible losses that may occur when exchange rates change.
One way small businesses can avoid being impacted too negatively, and reduce any risks to their finances, is by establishing a “forward contract”. This involves agreeing to the current exchange rate for a future business deal, which can help to guarantee a set price regardless of the changing market.
This does leave businesses vulnerable to missing out on a better exchange rate if it stabilises at a later date.
Another alternative is creating clauses in your contracts which allow you to renegotiate prices should the exchange rate change significantly within an agreed period of time. It is important to be upfront and honest about the inclusion of these clauses to avoid upsetting your suppliers.
Regardless of currency fluctuations, TransferWise could be up to eight times cheaper than banks to send international payments. They’ll always convert money at that day’s exchange rate – whatever it may be. You’ll just pay a small, upfront fee on the value of the transfer.
It is impossible to predict how exchange rates will change. Small businesses and start-ups may be the most vulnerable to fluctuating currency rates but if necessary precautions are taken, the impacts can be limited.
Careful planning can reduce the loss of profits in times of instability and forward contracts can help you to establish a fixed rate regardless of the current economic climate. However, there are some benefits to instability; a small business may notice an increase in imports due to customers across the globe taking advantage of the weakened pound or dollar.