Whether your business sells or sources products from other countries, remember this: your financial success is largely beholden to the whims of the currency markets and how you react to them.
Your revenues and profit margins are impacted every time the euro strengthens or weakens compared to other currencies. For example, a strengthening euro means you can buy more foreign goods, making your import costs less expensive. On the flipside, a stronger euro can hurt your overseas sales – as the revenue you generate from other countries translates into fewer euros when you repatriate.
As you might imagine, some business owners think it’s a daunting task to navigate the currency markets – which change by the second with each economic report or Brexit-magnitude event. But there’s good news: just because you can’t control the markets doesn’t mean you can’t protect (or grow) your bottom line.
1. Forward contracts can help you control import costs.
Want more certainty from your import costs? A forward contract lets you lock in today’s exchange rates for up to three years, so you know what you’ll be paying for your bills and supplies in sterling terms in the future.
For example, let’s say I need to order £100,000 of British barley to brew beer in my Bavarian brewery. If today’s exchange rate is €1.16 per pound, it will cost me €116,000 to order the barley right now. If the pound strengthens to €1.20 over the next quarter, it will cost me €120,000 for the same order of barley – or €4,000 more than it did before. That’s either €4,000 I have to take out of my profits to keep my barley prices the same or €4,000 I have to add to my beer prices – not a choice I want to make!
But if I were to use a forward contract to lock in the exchange rate at €1.16 per pound, I could keep my import costs at a predictable €116,000 per hops order for a fixed period of time – from six months up to three years. That gives me much more certainty when crafting budgets and setting prices.
Bottom line: Forward contracts are great if you’re looking to budget. Fair warning though, if the exchange rates move in your favour during the lifetime of the contract, in this example to 1.10, you’re still bound to the contract rate of 1.16. So in the event the rates move in your favour, you might end up paying more than if you left it in the hands of the spot market.
2. Spot contracts let you seize cost-saving opportunities.
Know a good buying opportunity when you see one? The spot contract lets you make an overseas payment “on the spot” (i.e. almost instantly) so you can strike when the iron’s hot.
Returning to my earlier example, let’s say I order £100,000 worth of British barley from my supplier, who will require payment in 90 days. I could either a.) use a spot contract now to buy the barley for €116,000 if the exchange rate is €1.16 per dollar, or b.) take a chance and wait if I think the pound could be cheaper in the future. For example, if I think the pound could lose value over the next 90 days should confidence in the May administration fall, I may wait until the exchange rate falls to €1.10 per pound before I pay the bill on the spot – which would save me €6,000 (over 5%) on my barley order.
Of course, if I chose to wait and the euro falls in value, I could end up paying more for my barley order. But the point here is that spot orders give me more freedom to take risks to potentially cut my import costs.
3. Rate alerts and firm orders help you grab cost-saving exchange rates, automatically.
Know the exchange rate you want to pay but don’t have time to watch the markets? Use an international payment company’s rate alert service or firm order to find that ideal rate and help you grab a cost-saving opportunity.
For example, if pounds cost €1.16 each, but I want to wait until they’re trading at €1.10 before I send a payment to my barley supplier, a rate alert service could notify me when pounds fall to that rate so I can grab my cost-saving opportunity. If I use a “firm order,” I could have an international payment company book the order for me as soon as the exchange rates fall to €1.10 per pound, so I can get the best deal possible on my imports.
Building an effective currency strategy for your business
Whether you use any one of these tools or a combination of them to pay suppliers or bills overseas, it’s important to have the right currency strategy in place so you feel in control.
Article contributed by World First UK Limited