Rise and fall: currency fluctuation

Rise and fall
Rise and fall

For UK SMEs looking to trade and expand internationally the risks around currency fluctuations pose a significant challenge, and movements in the financial markets can impinge on everything from cash flow to invoice payments. Jon Barker investigates what small business leaders need to know about currency markets…

August witnessed global stock market turmoil, wreaking havoc with British and American company earnings. China’s shock move to devalue its currency – the biggest cut to the yuan since 1993 – gave companies listed in New York and London a headache, as they battled a strengthening dollar and pound, and the continuing slowdown in China’s growth sent markets plunging.

What does this have to do with UK small and medium-sized businesses? Well, according to FX and risk management adviser AFEX’s Currency Risk Outlook Survey, 43 per cent of UK SMEs see currency risk as the most significant challenge they face when it comes to conducting business internationally – ahead of finding the right suppliers and customers (31 per cent) and managing payments (13 per cent). The survey asked more than 450 financial decision makers at SMEs with international operations about their attitudes towards global trade, foreign exchange risk and their methods of managing it.

Although small businesses in the UK don’t tend to trade internationally on the same scale as their counterparts in Germany and other EU countries, the UK’s position outside the Eurozone means that, when they do, they’ll be trading in foreign currency. This opens up a whole world of foreign exchange risk, where a contract is priced in local currency and the small business takes the risk that exchange rates will change, and the value received will therefore be lower – or perhaps higher – than was priced in. If exchange rates spike or plummet, it can have a serious detrimental effect on a company’s cash flow and can often mean the difference between making a profit and making a loss.

“Managing currency risk is often seen as something available only to the big multi-nationals that have dedicated finance functions and are doing huge amounts of trade overseas,” says Stuart Holmes, EMEA general manager for AFEX. “The fact is that in a world that’s becoming increasingly globalised, more businesses than ever find themselves exposed to foreign currencies.”

In the next instalment of our Rise and Fall series, we take a look at how to manage cash flow…