By Steve Plant
The foreign exchange (FX) market can be extremely unpredictable and daunting for SMEs. It is also critical when they are relying on profits from foreign trade and therefore it is key to implement strategies to minimise losses through unwanted or unexpected costs and rates. Although it can be difficult to plan for the future in this turbulent marketplace, there are ways of managing your forecast and cost, to ensure you get the best deal on your transactions. Here I will outline long, medium, and short-term FX strategies that every SME owner and financial director should have in their repertoire.
Arranging FX transactions in small, bite size chunks over the course of the year can protect businesses from poor exchange rates. This can be a good strategy in volatile markets as it averages out the rates over the course of 12 months, minimising the effects of random fluctuations. One drawback of this strategy however is that with multiple smaller transactions, businesses may be liable to pay more commission and ultimately lower profits. In more stable FX markets, this strategy should be avoided.
An alternative medium to long-term strategy to implement in more stable FX markets is securing spot contracts.
Many banks and brokers offer spot contracts; provisional FX transactions that will trigger once a series of pre-set terms are met. Businesses can decide the rate at which they want a transaction to be processed so that they get a favourable deal. This allows decision makers to know the cost and accurately forecast their international trades, reducing uncertainties in future accounts.
Although this strategy can remove some uncertainty, as rates are pre-determined, the changes in the markets mean that it is hard to predict when they will be met. This means businesses may be left waiting for a long time before a transaction is triggered if the markets are not favourable, and so financial resilience is essential.
Securing forward contracts is a longer-term strategy that allows businesses to apply the current market rate to future transactions.
Implementing longer-term strategies such as forward contracts can give SME owners peace of mind, as they will know the future value of a transaction in advance. This also protects businesses against unfavourable market rates, so is useful in more volatile markets or if predicted trends mean unfavourable rates are likely in the future.
Shopping around for the best deal is always a good strategy. Searching for brokers that will provide the best rates, lowest commission, and have no extra fees can save SMEs money on their foreign transactions. Calling brokers manually, or using broker comparison sites can help you find the best deal, however this can be time consuming and lead to future unwanted sales calls.
An alternative to bank and broker comparison sites is WhichFX, a service that drives down the spread (the profit the bank or broker makes on each trade) on transactions. WhichFX places brokers in competition with each other, as they bid to win your business. You are then provided with the best quote. This service allows SMEs to access rates previously only offered to large corporations.
This can be useful as an alternative for companies using banks and brokers when planning short and medium term FX strategies as it can secure businesses the best rates when market positioning is favourable.
Steve Plant is CEO, WhichFX