Effective currency management is essential for UK small business owners dealing with international transactions. Here are some practical tips to help you budget your currency needs efficiently in 2024.

1. Set a realistic exchange rate

Setting a realistic exchange rate is crucial for accurate budgeting. Many businesses make the mistake of using overly optimistic rates, leading to financial shortfalls. Here’s how to set a realistic rate:

• Look at historical data: Consider the average movement range of the currency pair. For example, the GBP/USD pair typically shows an average annual high-to-low movement of around 6 per cent.
• Calculate a realistic rate: If the highest rate for GBP/USD this year has been 1.29, subtract 6 per cent to estimate a potential low, resulting in a rate of approximately 1.213. This provides a more realistic budget level, accounting for typical fluctuations.

2. Use a currency exchange specialist

Currency exchange specialists, like Rutland FX, can offer more competitive rates compared to traditional banks, which often may charge 3 per cent or more plus transfer fees. Here’s why using a specialist can save you money:

• Lower exchange rate margin: Specialists often provide better rates. For example, on a £50,000 transfer from GBP to EUR, a bank might offer an exchange rate of 1.1482 with a £25 fee, whereas a specialist might offer 1.1800 with no additional fees.
• Cost savings example:
  • Bank: (£50,000 – £25) x 1.1482 = €57,354.75
  • Specialist: £50,000 x 1.1800 = €59,000
  • Savings: €59,000 – €57,354.75 = €1,645.25

3. Consider forward contracts

Forward contracts allow you to fix an exchange rate for a future date, adding certainty to your costs rather than trying to make extra profit on the exchange rate. This can be particularly useful in times of political or economic uncertainty.

• Example: If you expect GBP/EUR to fluctuate due to upcoming elections, and the current rate is 1.18, you can secure this rate for three months. If the rate drops to 1.1700, you still benefit from the higher rate. However, if the rate rises to 1.1850, you remain fixed at 1.18 which shows how it can also work against you.

The main advantage of forward contracts is the ability to plan your finances with certainty, knowing exactly what your costs will be regardless of market fluctuations. Weigh the pros and cons before committing to a forward contract, as it prioritises stability over potential gains from favourable rate movements.

4. Keep up to date with major economic news

Staying informed about major economic news can help you anticipate currency movements and make more informed decisions. The major factor everyone is watching right now is inflation, which is the main driver of exchange rates currently.

Inflation rates significantly impact currency values. If inflation in the UK is rising faster than expected, the Bank of England might raise interest rates to control it, which could strengthen the GBP. Conversely, high inflation without corresponding interest rate hikes might weaken the GBP. By keeping up to date with inflation trends and related economic news, you can get a better idea when to exchange currencies or fix exchange rates.

How Rutland FX can help

Rutland FX has been assisting SMEs with their currency needs for almost a decade. Depending on the volume of currency your business converts, Rutland FX can offer significantly more competitive rates than a bank would. With a focus on personalised service and cost efficiency, they provide tailored solutions to help small businesses manage their international payments effectively.

By implementing these tips and considering the services of Rutland FX, you can better manage your currency exchange needs, reducing costs and minimising financial risk.

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