In the wake of the recent COP26 climate summit, sustainability is at the forefront of many of our minds, and it is clear that consumers are looking to businesses to play their part in helping to tackle climate change.
Most successful businesses have combined expertise in their product or service with an understanding of their customers’ needs. To keep ahead of their competitors, they need to constantly innovate and research their existing and potential markets.
There are, however, other factors to take into account. Many of these are financial; funding costs, investor relations, and liquidity management are common examples. Unfortunately, foreign exchange is often bumped further down the list of priorities.
A review of recent business news highlights how foreign exchange can make a real difference to engineering companies. In October of this year, the steel industry took a hit when Tata announced that it would dramatically cut its UK employee numbers. Tata attributed this mainly to three factors:
- high energy prices
- cheaper steel imports from China
- higher than expected Sterling prices
This means that the pound had strengthened more than Tata had expected or hedged against – and it wasn’t the only company with problems. Industry sources quoted an expected loss of 15% of the workforce in the UK steel industry.
There was a similar story earlier in the year, when Rolls Royce predicted that, despite increasing orders from the aerospace division, there would be a foreign exchange translation loss of £350 million. Rolls Royce earns a lot of its revenue from export markets, and the strengthening pound meant that, for financial reporting purposes, profits earned in euros (for example) became less valuable when translated back into Sterling.
Although both Tata and Rolls Royce are large firms, smaller companies can feel the same impact, particularly when they rely on export sales for a material part of their revenue.
Rolls Royce and Tata are large enough to maintain their own in-house Treasury teams, so if these challenges can crystallise for them, smaller companies are even more vulnerable to being caught out by unexpected currency market movements.
Companies of all sizes can benefit from adopting a proactive and analytical approach to foreign exchange. There are many different strategies available, constructed out of several types of foreign exchange instruments. For smaller and medium-sized companies, it may be worthwhile to consult a specialist currency broker.
At Currencies Direct, we can provide an overview of the current market situation and one of our experts can help you to analyse your foreign currency requirements. We can then work with you to construct a suitable foreign exchange risk mitigation structure, using spots, forwards and various option deals as appropriate.
Get free analysis of your foreign exchange strategy today, just send a request to: [email protected]