Post Brexit currency fluctuation and how to hedge against it – do you have a plan for your business?

posted in: Brexit, Cash, Currency 0

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The Brexiteers didn’t have a plan, the former PM David Cameron didn’t have a plan – so it’s hardly any wonder that many SMEs don’t have a plan for a Brexit-vote landscape…

Well, we need one now and we need it fast. A lot of my clients who run SME’s are suffering the immediate impact of currency fluctuations and the pound falling through the floor against the dollar to levels not seen for 30 odd years. The bottom line is no one can plan effectively if you’re at the mercy of fluctuating markets and panicked bankers.

So here’s my advice in two steps. Step 1 is how to develop a currency strategy, Step 2 specifically looks at ways and means of minimising your exposure to currency fluctuations. In these uncertain times, these could easily mean the difference between profit and loss for internationally trading companies.

Step 1: Have a plan

  1. Don’t panic! The Brexit process will take at least 2 years so get a short term plan in place as an interim measure to hedge against the currency risk and ensure you have enough cash flow and credit lines to see your business through these uncertain times.
  2. Start talking to your suppliers and customers to reassure them of your position & dispel all the misinformation that’s around.
  3. Consider your exposure to the currency risk by establishing what you are expecting to pay for, get paid for, in what currency and when.
  4. Understand how exchange rate fluctuations will impact our incomings and outgoings.
  5. Establish goals such as an ideal exchange rate that allows you to remain in line with your business’s budgetary projections – know your best, worst and expected projections so you can create your currency policy.

Step 2: Ways & Means of hedging against currency fluctuation

  1. Internal hedging – if possible given the company cash flow, buy and sell in the same currency at the same time.
  2. Forward hedging: sell a set amount of foreign currency at a pre-agreed exchange rate up to one year ahead but beware – the date is fixed so make sure your suppliers are reliable.
  3. Price and sell your products in the foreign currency in exchange for cash in advance at the current market rate and transferred within a couple of days.
  4. Agree an exchange rate with your suppliers for future orders.
  5. Consider a bandwidth where contracts can be renegotiated if exchange rates move beyond an agreed area of tolerance (unlikely with EU countries but possible for softer currencies).
  6. Insist payments are made in GBP.
  7. Open a foreign currency account and rarely convert to GBP – ie match buying and selling in that country from that account, thereby minimizing exchange rate effects.
  8. For big purchases, buy when the rate is favourable and hold the currency in a specialist foreign exchange business account.
  9. Check transaction costs of exchanging funds from a local currency as they can be hefty.
  10. Consider Currency Protection products – although beware as they can be expensive
  11. Get advice from a foreign exchange specialist.

And finally… don’t forget to look for opportunities!

Take advantage of the drop in Sterling – use it as a positive for incentivising overseas buyers