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Currency fluctuations can have a major impact on the profit and loss of e-commerce businesses. So, how do you protect against movements in the market that could erode margin and revenue?
Michael Johnston, Director of Foreign Exchange for international money transfer and foreign exchange specialists HiFX, has five strategies to help manage currency changes.
Many businesses that sell in to a local market don’t realise they are exposed to foreign exchange fluctuations, says Johnston. “The first thing you need to do is sit down and figure out where your risks and exposures are and how much they matter, now and in the future,” he says.
“Your particular business may not appear to have a major exposure, but what about your customers? And what about your suppliers?
“Track your production and sales process from sourcing all the way to the final sale. Who do you rely on to get things done? Are their businesses, or lives, impacted by exchange rates? What about that piece of machinery you might need to buy in six months? What happens if rates change and it becomes much more expensive?”
Once you understand all your areas of exposure and the percentage difference to your bottom line that currency fluctuations could cause, it is much easier to prepare a plan to deal with any potential negative effects.
Through your bank, or via a specialist foreign exchange business such as HiFX, it is possible to buy large amounts of foreign currency and hold that within an account. If you have a large, foreign-currency-related purchase coming up, or you want to protect against short-term movement, then buying when your own currency is strong is a good way to hedge against future shifts.
“By doing this, you’re locking in rates today for what you will be needing to spend later on,” explains Johnston. “There are also certain financial instruments you can use that could mean you will only need to put up a small percentage to lock in the full amount.”
SMEs enjoy the upside they can experience from exchange rate fluctuations, but the downside of those changes can be crippling for a small business."
Michael Johnston, HiFX
A “currency option”, says Johnston, is like buying an insurance policy for a specific exchange rate for a specified length of time. You’re buying protection against the rate moving adversely. A currency option is essentially a financial tool that an investor or business manager can use to hedge against foreign currency risk.
“Large corporations have entire teams working out these sorts of strategies, but SMEs can do it just as effectively by keeping it simple,” says Johnston.
“Currency options limit downsides, while allowing you to enjoy the benefit of any upside. It costs a little more to use such an instrument, but if you build these costs into your model, then it frees you up to build your business while knowing your margins are protected. Plus, you no longer have to check the exchange rate five times each day!”
In the world of finance, a “stop-loss order” usually refers to an order placed with your broker to sell a security, such as a specific tranche of shares, once it drops below or rises above a certain point.
If your business is holding, or expecting to pay or receive foreign currency, you can do the same thing with your foreign exchange account through a specialist foreign exchange business such as HiFX, says Johnston.
“SMEs enjoy the upside they can experience from exchange rate fluctuations, but the downside of those changes can be crippling for a small business,” he notes. “Using the tools available, you’re not picking rates or trying to predict the market movements – you’re simply hedging to protect yourself. You’re giving your business some certainty which helps to ensure you stay in business.”
In order to protect against the extremely seasonal nature of the ice-cream business in the southern hemisphere, ice-cream producer New Zealand Natural sought partners and opened outlets in the northern hemisphere to guarantee year-long demand. As a business owner or manager, you should think the same way, but from a foreign exchange point of view.
If the Australian dollar is up, which currencies are usually down, and vice versa? And if you are looking to expand into new countries, make sure currency shifts is one of the things you think about when deciding on which markets to target.
HiFX is a foreign exchange company with offices in UK, Spain, Australia and New Zealand. It works with clients to try and achieve savings and minimise the impact of fluctuating exchange rates.