A guide to foreign exchange for first-time exporters
In the first of a series of articles for Business Advice, Andy Reid, managing director of global payments at moneycorp, offers the inside scoop on how micro firm owners can best manage their foreign exchange needs when trading overseas.
Overseas trade is not just the domain of large multinational companies. With a growing number of UK small businesses undertaking trade with overseas companies, micro firm owners need to be increasingly savvy to international trade opportunities to get ahead. One of the main issues that many overlook when trading internationally is managing foreign exchange (FX) risk. The steps below will help you deal with this as you begin trading abroad.
The first step to managing your FX risk is planning. Agreeing on a budgeted exchange rate for the year will guide your transactions. Your budgeted rate should take into account the volume and timing of your expected transactions, as well as a realistic assumption of current and future rates. An FX specialist can help to define this rate by analysing past trends.
(2) Plan ahead
Planning ahead will help protect your business from foreign exchange risk and enable you to benefit from any exchange rate movements which are in your favour. Even small rate fluctuations could make a huge difference to your bottom line, especially for a small company.
Recent Moneycorp research revealed that British small business owners could be losing as much as £110m every year through not managing their currency risk while making international payments. That is why it is important to consider the existing state of the currency market you’re looking to enter before you start exporting.
(3) Do your research
It is vital for small business leaders to have a solid understanding of the currency market that they want to enter before beginning to trade. Currencies around the world can be affected by a number of factors that are out of control of businesses. These include supply and demand, economic growth, interest rates and politics. With a good understanding of the currency market you’re operating in, you can begin to develop a strategy to best manage your investment risk.
(4) Don’t forget where you come from
As well as the currency market you’re entering, you must thoroughly consider the outlook for the pound. If you are an importer, a strong pound tends to be good news. On the other hand, for an exporter, a stronger sterling can make a product or service more expensive in an overseas market, or it can reduce the margin a business is able to take home when selling its product or service abroad.
Don’t forget to check back next week when Andy Reid will be outlining the importance of considering your business objectives in order to manage your FX risk.
Andy Reid is managing director of global payments at moneycorp, which provides international payments and foreign exchange services.