When a UK business of any size imports goods from overseas, it exposes itself to exchange-rate risk. The waxing and waning of the pound can have big implications for your profit margin – but such changes are inevitable, especially with the world’s economic outlook being so uncertain.
Let’s take a look at a few ways in which currency-related risk can be managed.
Why Currency Risk Matters for the Wholesale Sector
It doesn’t matter whether you’re importing or exporting, or whether the pound is strong or weak; change will affect your operations. But how?
When the pound is strong, exporters might find themselves at a competitive disadvantage, when compared to rival businesses in foreign markets. When it’s weak, however, profit margins can shrink quickly.
Currency fluctuations directly influence the effective price of what’s being bought and sold. This can make it difficult to, say, plan for an expansion. If you don’t know whether your profits are going to be big or small, investment becomes a gamble.
How Volatility Can Erode Margins
Shifts in the exchange rate don’t have to be very large to eat into your margins. If you’re ordering in sufficient volume, or you’re dealing with many different suppliers and performing many different exchanges, their effects can quickly compound.
Suppose that you’re importing a given quantity of a given product from the United States, and you agree to pay for it after a delay of a few months. If the pound weakens by, say, 10% against the dollar, then the effective price of your order will grow by the same amount. If your margins were slim to begin with, then the deal might well end up as a loss-maker.
Taking a Proactive Approach to Cost Control
So, what can be done to address these problems? A number of solutions suggest themselves. For example, you might decide to simply not deal in foreign currencies, and do all of your business in sterling. This, however, will push away many potential trading partners, and thereby push up your prices.
Another approach is to use a forward contract to keep your costs fixed over a certain period. This can help to absorb short-term fluctuations, and keep your margins predictable. This can make the investment viable.
Making sure that you have a grasp of strategic procurement is essential if you’re trading overseas. This will help you to limit your spending to what is actually required, and thereby reduce your exposure to exchange-rate risk.
How Forex Hedging Helps Wholesalers Stay Competitive
There is one powerful approach to this kind of risk that we haven’t mentioned, and that’s forex hedging. This effectively means betting against the currencies that you’re trading in, so that, in the event of a collapse, your position will be protected.
The essence of this strategy is easy to understand, but getting it right can require a little bit of experience and fine-tuning. If you’re dealing a lot in foreign currencies, it’s something that’s well worth considering.
