The retail industry is more competitive than ever with more and more businesses trying to undercut one another and consumers demanding more in terms of service and how they shop. Many retailers are therefore reducing their profit margins to remain competitive. However, this combined with weak global economies and fluctuations in exchange rates can leave a business’ already narrow profit margins at risk.
For retailers who import food and drink, clothing and other products to be sold in the UK, movements in exchange rates have a huge impact on how they protect profits and set their prices. With there still being so much political uncertainty surrounding Brexit currency fluctuations are likely to continue for the rest of 2019 and into early 2020. It is therefore crucial that retailers have protections in place to ensure their business is not caught out. This can be done through a hedging strategy, understanding how much of a particular currency you will require over a given period and then securing it when the rate is in your favour.
Hedging allows businesses to secure their currency in advance and continue to buy at the same rate even if the market changes. This means they can lock in their profits for the year and as a result, don’t have to gamble their bottom line on the foreign exchange market. This is ideal for retailers as it provides them with both the flexibility and security they need during a time of currency volatility.
Currency//UK has supported many retailers with their foreign exchange requirements, one being a UK business that buys electrical goods from the US and pays for them in US Dollars. When the UK business makes an order, the electrical devices are built and shipped over to the UK. The lead time on these electrical goods can vary and can be anywhere between 1 to 6 months, therefore 30% of the cost of the order is paid upfront and 70% once the delivery has been received. Problems occur however when the exchange rate moves in an unfavourable way, during this lead time, meaning the price of the remaining 70% of the order has increased.
For example, if the total cost of the order is $500,000 and the GBPUSD rate is 1.35 at the point of order the goods would cost the UK business £370,370. Based on the agreement $150,000 (£111,111) is paid upfront and $350,000 (£259,259) will be paid once the items have been delivered. If the build and delivery of the goods take 5 months the likelihood is that the exchange rate will move within that time.
In this scenario, the GBPUSD exchange rate has dropped to 1.30 by the time the order has arrived. This means that the outstanding $350,000 will now cost the UK business £269,230 rather than the £259,259 it would have cost once the order was made. If the business had secured the exchange rate at the time of making the order by hedging the US Dollars they needed to buy they would be £10,000 better off. With exchange rates constantly changing due to both economic and geopolitical events a large shift is never out of the question.
Dealing with multiple currencies within your business can lead to uneasy time for owners and/or finance teams who as a result are continually keeping one eye on the market, hoping that it shifts in their favour. We have also seen cases of businesses losing their entire profit margin due to a change in the FX market and turn down new business opportunities due to cash flow concerns if the market moves unfavourably.
By working with a foreign exchange specialist such as Currency//UK you can avoid this uncertainty and lock in your profits early, leaving you confident in your finances and not reliant on the market determining your business’ bottom line.
If you would like to find out more about how we can support your business with its foreign exchange requirements call us today on +44 (0 )20 7738 0777 to speak to one of our FX specialists or click here to open a business account with us.
Posted in Business Resources on Dec 16 2019