Operations: International trading

Minimising risk from currency fluctuations

Rocco Magno, general manager of American Express FX International Payments, offers his thoughts and advice to UK companies on how to manage their international payments and minimise risk during a volatile European Market.

 

According to our research, over half (56 per cent) of UK small and mid-sized companies say their confidence in international trade has decreased over the last year as a result of the volatility of the Euro. This is hardly surprising as the headline-dominant ‘Eurozone crisis’ is front of mind for many UK business leaders trading internationally.

In fact, the top concern when importing or exporting is fluctuations across all currencies. Indeed, the last year has been tempestuous for exchange rates: for example, since the end of April 2011, sterling has weakened by over eight per cent against the US dollar.

Despite the concerns, the majority of UK SMEs do not protect themselves from the risk of currency volatility and as such, the average UK SME risks losing over £19,000 a year, equating to £20.4 billion across the market as a whole. These fluctuations are not only affecting confidence but also the bottom line for many companies, due to a knowledge gap on how businesses can protect themselves from these fluctuations.

As 2012 looks set to be another year of uncertainty, it’s important that companies understand there are a number of tools and methods available which can help minimise their risk.

Planning ahead

If I could give just one piece of guidance to a UK business owner operating in the international marketplace, it would be to plan ahead. It’s essential that companies look ahead as much as possible when managing international payments in order to effectively protect themselves from currency fluctuations.

The purchase of forward contracts is an example of a simple currency hedging strategy, providing protection against movements in exchange rates. Similar to purchasing a fixed rate mortgage, a forward contract allows a business to lock in an exchange rate for a chosen period of time. Locking in the exchange rate means the risk is minimised by fixing future costs—hence, increasing control over budgets and forecasts. The forward contract means a business is able to make payments at the pre-agreed rate, regardless of the actual market rate.

With forward contracts, as with other instruments to protect against risk from currency fluctuations, it’s important for a company to look at its individual requirements for international trade. With this at the epicentre of a company’s strategy, the business can take a tailored approach with the tools and services available. For example, American Express FX International Payments offers two types of forward—fixed or window. A window contract is more flexible, still allowing customers to buy an amount of currency at a fixed rate over a specified time period, but also allowing draw down on this sum at any time from inception to maturity, thus providing a significant cash flow benefit.

These are just examples of instruments which are available to businesses, the main takeaway being that companies can talk to experts and find out what works best for their business needs.

Exchange rates

In a market where uncertainty is the name of the game, there have been some bold fluctuations recently—certainly with the sterling paired against the Euro or the US dollar. In addition, we are regularly reading about problems in the European market, which can paint a worrying picture; but what in reality is the impact on exchange rates?

With this in mind, it is more important than ever for companies to familiarise themselves with exchange rates and any variations when trading in the international marketplace. Foreign exchange providers can help in this area, contacting customers when rates may be favourable, warning them if there are events that could negatively impact rates. Daily updates from providers can help build knowledge on a certain market and currency.

This knowledge should be shared across all areas of the business from the finance department to the sales team: finance so they can understand any implications on the bottom line; and the sales team so they can understand what margins they can play with. In addition, increasing your knowledge on currency fluctuations in the relevant markets can help build confidence in the international marketplace.

Speak to the experts

With this increased knowledge and confidence, companies can confidently discuss their international payments strategy with their provider. The core service of a central foreign exchange provider is to help protect the customer’s business from foreign exchange risk and manage their budgets. We acquire a deep understanding of the customer and with them build a strategy on how to manage their foreign exchange risk, offering the best instruments for their business.

With these factors met you can build a trusted relationship with that service provider and ensure your time is spent on your core business. With the international marketplace growing and becoming more common practice for UK businesses during this ‘export-led recovery’, it is important to seek the right guidance, not only to minimise risk against factors outside of your immediate control but also to enable you to plan and grow your business effectively.

Streamline payments

The world is getting smaller, and companies need to move money around it faster than ever before—giving you the competitive edge and service which suppliers and customers can come to rely on.

International payment specialists focus 100 per cent on their core business of foreign exchange, leaving businesses to concentrate on what they do best. This helps streamline operations and gives the opportunity to pass the rewards of these efficiencies on to customers. The ability to make fast, efficient payments overseas can be a significant contributor to a company’s success.

Business owners can contact the American Express FX International Payments team on 0800 73 11 366 (representatives are available to answer Monday to Friday, 24 hours a day) or can visit the recently upgraded website (www.americanexpress.co.uk/fxip), for further information.