The world of today is smaller than ever. Technology has made it possible to do business with anyone, anywhere. And with the opening up of the world has come a host of new opportunities for innovation, trade, and growth.
But with new opportunities come new risks.
Effects of exchange rates on business
The effects of exchange rates on your business can impact how competitive you are domestically and abroad. If there is an appreciation on the currency, exports increase in price reducing your competitiveness abroad. A depreciation in currency will increase import costs which if you rely on these imports will reduce margin or price competitiveness domestically.
Effects of exchange rate fluctuations
While international growth can offer new opportunities, it also comes with its own challenges. One such challenge is the risk of currency fluctuations that comes with sending and receiving international payments. Of course, you could avoid this risk by simply sticking to your own currency. However, since your customers will likely prefer to pay in their local currency, to do this would be to exchange the risk of currency fluctuations for another, potentially bigger risk – that of your customers taking their business elsewhere.
So, if you’re exporting your product or service and are receiving funds in a foreign currency – there is the chance you could lose out on money if the pound gets stronger. Similarly, if you’re importing and making payments in a foreign currency, you could see your costs increase if the pound gets weaker.
But just how significant a problem is the risk of currency fluctuation for SMEs? To find out, we spoke to one thousand owners of SME businesses to learn about their biggest commercial challenges.1
As expected, foreign currency payments are commonplace – 25% of SMEs said that they’d received at least one in the last month, while 16% said they had in the last week. And the risks are real. 42% of business owners told us that they’d lost money due to foreign currency fluctuations, whilst a further 25% were not sure. In the worst cases, 15% of businesses said that currency fluctuations cause them to lose money every month.
A multidimensional risk
The speed at which exchange rates shift is increasing over time. In other words, when it comes to foreign currency payments, the difference between what you charge or are charged and what you eventually pay or get paid is only going to get less predictable.
Changes in foreign exchange rates are often tied to real-world events. For instance, the referendum of the UK leaving the European Union caused a significant change in rates between GBP and other currencies. This meant that any British business that bought products or services from a Euro-zone company in Euros just before this event could have had to pay more than they planned.
But it’s not just major events like Brexit that can affect Forex rates – there are plenty of smaller ones happening all the time.
How can businesses minimize their exposure to exchange rate risks?
The good news is that forex fluctuations can be managed. However, our research revealed that many SMEs aren’t doing this. Amongst the business owners we spoke to, 43% told us that they don’t actively manage the risk posed by foreign currency fluctuations. This is likely due to perceptions around how complicated and time-consuming such a practice might be. As an SME, you simply don’t have the resources to devote to the challenge.
For more information on strategies that you can use to protect your business from currency volatility, have a look at our how-to guide.
1. 1. In July 2019, American Express, through uGov, surveyed 1,000 SMEs, in the UK.