Currency Exchange rates are constantly changing. The Pound’s value has been in flux recently, following its plummet after the mini-budget. Of course, when dealing with foreign currencies, there will always be some volatility. But what happens when that volatility eats away at your profitability? How can you budget and plan for imports? When the Pound’s value changes dramatically, it can become hard to predict how much your goods will cost. And that can wreak havoc on your bottom line.
Whilst the economic situation in the UK is still very much up-in-the-air, we’re not going to get bogged down with the why; countless politicians and media channels have dissected and chewed over each morsel of reasoning following the fallout of the mini-budget. However, we want to highlight the importance of being prepared to deal with these currency fluctuations.
For many years now, companies have been conducting business on an international scale. However, whilst many people take comfort in knowing that a reputable bank is looking after their money, they often charge hefty fees on exchange rates of 5-6%. Although this may not sound as though it amounts to much, a client could lose out on thousands of GBP interest if they have large amounts of money in the bank. For example, Travelex is 10-12% on the high street. Although this interest rate isn’t too detrimental if you’re withdrawing small amounts for a holiday, this doesn’t make sense for more significant business transactions.
Enter The Broker
Brokers, also known as FX houses, got involved, and other vendors could offer lower rates to SMEs. In addition, FX banking allows customers to go into their portals and exchange money or even order cash for a future date. As a result, many customers opt to buy their currency in advance and could invest millions in pre-purchased currency. This pre-purchasing is called FX forwarding. At Kinyu, we pride ourselves on partnering with experts in the field, and we work closely with Thwaytes Capital to manage our FX exposure. Co-founder Charlie Thwaytes comments:
“80% of names trading nationally have lost out on money due to currency fluctuation, many over 1 million”. Charlie Thwaytes – Co-Founder, Thwaytes Capital.
Now that we have discussed the relationship between foreign currencies and the rise of the FX house let’s return to the mini-budget. One of the most significant fallouts from the mini-budget was the near 5% drop in the Pound. This drop took place over just a few days and starkly contrasts the beginning of August 2022, when GBP was trading at around $1.19. After Liz Truss announced the mini-budget, the rate was as low as $1.03. According to an article by Forbes, this dramatic fall led to the Pound reaching its lowest rate since 1985. In the words of Liz Truss herself… That. Is. A. Disgrace.
So, to explain how this impacts SMEs, let’s imagine you are a UK importer of goods. You import goods from suppliers in China, sourcing both items and materials in USD. As an SME trader, you should employ foreign exchange companies to sell you the currency of the country from which you purchase your supplies. This planned currency purchase is an FX Forward, and you can benefit for multiple reasons.
- FINANCIAL PROTECTION: If the Pound drops, it will start eating into your profit. In extreme cases, for example, if GBP were to drop 20%, your markup would be much less, eliminated or even running at a loss.
- STRONG SUPPLIER RELATIONSHIPS: By securing the rate, you will always know exactly how much your products cost, no matter what happens to the currency. You won’t need to have awkward conversations with your supplier, as you can both plan for a set price.
There is no Crystal Ball for Currency Exchange.
Whilst this may seem like a failsafe solution, there are some downsides. If people start to hold out to profit from the exchange rate, they can lose even more money. Getting bogged down with where the market is going is difficult because no one ‘truly’ knows where it is going.
Navigating the trends in FX can be tricky, and it involves knowing your supply chain in and out. It also consists of locating, screening and working alongside the right partners. Picking the right partners for your business can ensure that you maximise your financial potential and have accurate insights.
Good Supply chain management means managing all the risk factors, including currency fluctuations. At Kinyu, supply chain management is our bread and butter, and we work with strong partners like Thwaytes Capital, enabling our clients to cover all bases.
Whilst you can do everything possible to eliminate FX risks on your side, suppliers can sometimes expose you to risks through their supply chain. So stay tuned for our upcoming blogs as we further unpack fluctuations in USD and RMB currencies.
