As geopolitical tensions between the East and West rise, sanctions and souring relations could have lasting impacts on business globally.
UK trade shows import and export activity and is a main contributor to the overall economic growth of the UK; with exports of goods increased by £0.8 billion to £23.6 billion in August 2015 according to the Office for National Statistics (ONS).
The UK industry is rightly focused on making the innovations which drive this success, and in closing the deals which create this income. However, almost all overseas export revenue is generated in currencies other than Sterling, and needs to be turned into pounds before it can be recognised or booked. This currency transfer process can be an expensive and uncertain business.
Organisations rely on the expertise of many different supporting disciplines, from PR firms to logistics suppliers. Among these are financial service providers offering banking and other services.
Expanding your business into international markets can be a good catalyst for growth, but also comes with its own challenges and risks.
Foreign exchange effect on your business: There are two main areas where an exporting firm could look to improve its rate of return from its foreign currency dealings:
1. Foreign exchange rates and the importance of priceThe most obvious area where a firm could improve its rate of return is on the rate (or “price”) at which it gets its currency conversions. A good rate can significantly increase a firm’s profit margins. For example, if a company is operating at a 20% profit margin, a 1% increase in revenue will result in a 5% increase in profit.
The foreign exchange rate offered by a bank as part of an SME banking package – especially once the bank’s fees are added to each transaction – may not necessarily be the best rate that can be achieved. It really can pay to look around.
2. Reducing risk with greater certainty about the future
When a company asks a bank for a rate to convert money from one currency to another, the bank usually quotes the “spot” rate, which would be the rate used if the transaction was carried out immediately.
If the company knows what its future revenue streams might be, it could choose to gain greater revenue certainty by entering into forward agreements (where a pre-agreed rate is used for the future conversion of a known amount of currency).
This certainty, however, comes at a price: the company waives its chance to benefit from any improvements in the currency rate. The best of both worlds can be achieved with foreign exchange options (FX options).* When these are used correctly, a company can take advantage of improvements in the rate, while still enjoying protection from the rate moving against it. There can be a fixed, upfront fee involved in buying an option. But if the future revenue stream is more complicated, with some amounts known and some not, using a combination of these tools could be a good idea.
There are plenty of tools at your disposal to get this right. Where you lack the in-house skills, our foreign exchange specialists will provide the experience and knowledge. At Currencies Direct we take the time to evaluate your business in order to unedrstand its processes and objectives and offer tailored services that meet your specific business' needs.
*FX options and derivative products can carry a high level of risk and may not be appropriate and/or suitable for everyone. Please take all reasonable steps to understand certain key concepts before transacting in them. More information is available at: currenciesdirect.com/options and in our product disclosure statement.