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There are a raft of components UK businesses need to consider as they start to emerge and operate from the recent global pandemic. Despite the government having thrown more than the kitchen sink at the problem, many small-to-medium sized businesses have understandably struggled to come to terms with the drastic implications which have developed and are skating on financially thin ice. Mitigating risk and increasing cashflow is more important than ever.

This is particularly relevant for businesses making and receiving foreign exchange (FX) payments as international trade with overseas suppliers and clients resume.

Historically, only larger corporates would focus on global markets. But in this ever-changing world where startups are more and more driven by technology, international market access is far easier and the spectrum of UK businesses trading globally is broadening. This may include sourcing products from overseas, servicing clients in other jurisdictions, or quite simply managing internal finances for global offices whilst operating in Sterling from the UK. Businesses should regularly review costs associated with FX payments as well as assessing guidance on how best to manage currency movement risk.

Implementing a robust FX policy will protect and preserve vital funds as well as safeguarding profit margins. Indeed, it could be argued addressing and managing risk is more important than cost saving, although they shouldn’t be mutually exclusive.

How to manage FX risk

Since the beginning of 2020, Sterling has had a 24% swing versus the US Dollar {see chart}. This is a huge movement which could, if not managed properly, mean success or failure for a business. If a UK importer operates on a 10% profit margin, those profits would have been completely eradicated in Q1 purely due to the depreciation of Sterling, all else being equal. The only real option in this case are to pass costs on to the customer or take the financial hit during that period. Neither are very appealing.

In real terms, purchasing USD 100,000 to pay a supplier in January would have cost GBP 75,187 as opposed to GBP 87,719 in March – an increased cost of GBP 12,532.

Corporates insure their business against a whole range of things from building cover to public liability. But many still leave their FX exposure completely ignored. Protecting cashflow can be done using a range of simple hedging products which allow businesses to lock in rates for extended periods of time in the future. Utilising Forward Contracts is the most common way of doing this. By purchasing currency in advance, businesses are able to accurately forecast the cost of a particular contract, or feel safe in the knowledge they will receive the amount they had budgeted for from an overseas client. Forward Contracts are flexible and can be set up to suit every individual business.

A well respected and diligent FX broker can assess cashflow, suggest suitable strategies for every scenario and make sure the customer is best placed to protect their business moving forward.

What is the catch?

Forward Contracts normally require the customer to commit an upfront deposit (up to 10% of the total notional amount) at the time of booking. This is collateral in case the customer defaults on the contract. Not ideal from a cashflow perspective, however, it is worth asking the FX broker whether they can provide a credit facility to utilise forward contracts most effectively and waiver the requirement for a deposit.

If the FX broker cannot provide this, then certainly look around, especially to the larger institutions who are more likely to be able to accommodate. In an age when ‘cash is king’ for UK SMEs, this is vitally important.

In a world of technological transparency, reducing FX costs has never been easier. A quick and simple FX healthcheck auditing historical transactions could highlight savings and allow the company to make an informed decision as to whether they wish to change provider or not.

Why is this so important now?

No one can predict how or when we will emerge fully from this pandemic and indeed what the trading world will look like once it is over. Likewise, no one can second guess how the currency markets will digest news and events especially when we factor in Brexit too.

Companies who thrive on remaining competitive in a global market need to assess their policies and manage their FX exposure in the most cost effective way whilst not leaving themselves open to the potential pitfalls of negative currency movements. Mismanagement of international payments can be the difference between success and failure during these volatile times.

There are alternatives in the FX marketplace right now and choosing a reputable, credible and reliable foreign exchange provider is key.

Article by: John Wardle

As seen in Issue 5 of The Bottom Line