Murdoch MacLennan: Businesses must be aware of currency risk as international trade beckons
Murdoch MacLennan, banking partner with Azets, is warning export-focused businesses targeting markets outside of the EU that they need to be aware of the risks and costs of currency differences and fluctuations, an issue that will be new to many businesses if they have only traded with the EU.
Currency management will be an additional new risk for many businesses that may have only dealt with the Euro.
The news that EU exports have fallen by 40% and imports by 21% has highlighted the changes now underway with cross-border trade. Whilst the figure may be inflated by the immediate post-Brexit problems, it is likely that we will see a trend of declining exports to Europe.
Although other exports increased by 1.7%, and the Prime Minister recently disclosed that the UK is the world’s 5th largest exporter, many businesses will now be considering how to target other markets outside of the EU. This brings a whole new set of export management issues, of which currency management will be a key factor. Companies need to develop strategies for currency management as the wrong decisions could be very costly.
As new UK trade deals are secured across the globe more and more businesses may be required to trade in different currencies and at different levels than they have previously. Most SME businesses are not and should not be currency speculators but should ensure their product or service is priced correctly with good margins.
Businesses seeking to trade internationally should, wherever possible, to ensure that customers and suppliers are paid in the same currency, thus helping to reduce currency risks.
The ideal scenario is where payments are received in a specific currency, such as dollars, and payments are made in the same currency. This creates a natural hedge and removes the risk of fluctuations in the chosen currency.
Businesses must ensure they do not end up with excess currency that requires conversion back to sterling, and if the rate has moved it can result in significant cash losses.
As imports and exports increase again and there is a rise in non-EU trade, it is important that companies put in place an active currency strategy to ensure they minimise risk and protect their hard-earned cash.