How startups and SMEs can mitigate currency risk
Fri 30 November 2018 - 2:09 pmSmall Business
Almost all Australian businesses are exposed in some way to currency risk caused by the fluctuation of the dollar. Even if you’re not selling directly to international customers, you may be importing goods or services, or working with suppliers and vendors with overseas connections.
The recent spate of global trade wars has significantly increased volatility in currency markets. As a result, now more than ever small companies need to be aware of risk associated with price movements of the Australian dollar, and how best to mitigate that risk while limiting losses.
FX fluctuations can rapidly erode operating margins and blow holes in even the best-planned budgets, leading directly to the following downside scenarios:
- Increased foreign currency risk exposure: No small company C-level executive wants to complete a foreign currency transaction, only to see the company’s profit compromised by a weak foreign currency exchange rate. Yet without proper FX risk management, that risk is all too real.
- Problematic profit outlook: FX markets are complex and opaque. With currency markets frequently volatile, it’s difficult for smaller companies to accurately gauge the business and profit potential of an overseas market.
- Understaffing a problem: Overwhelmed finance and accounting staffers tasked with solving thorny foreign exchange volatility problems can wilt under the pressure of accurately assessing foreign currency movements. This could result in your company missing out on a lucrative foreign exchange transaction.
The Australian dollar has been notoriously volatile in recent years. In the past two decades alone, we’ve seen lows of USD0.47 and highs of USD1.10, representing an extremely wide range. Even in the last five years, the Aussie dollar has fluctuated between USD0.70 and USD1, which has been particularly difficult for startups and SMEs to manage.
By implementing an effective, creative foreign exchange risk management strategy, your company can minimise FX exposure, limit foreign exchange losses and better manage the unpredictability of the currency markets. To avoid incurring an unexpected black hole in your balance sheet, you could take these five practical steps to managing your FX strategy.
- Calculate risk exposure against profit potential
As a small or mid-sized company decision-maker, is it worth your while to expose your firm to foreign exchange risk? That’s a fair question to ask. If you’re primarily making smaller payments overseas, the need for a substantial FX risk program is relatively low. Yet if foreign exchange transaction activity is high, you’ll need a strong risk and volatility FX campaign in place, if only to accurately gauge the downside of rates decline against your currency position.
- Mitigate risk outside the FX market
Smaller companies can reduce FX rate risk and volatility by hiking costs for their goods and services in foreign markets. They can also curb potential downside risk by reaching out to international business partners and customers and asking to transact in a different currency, such as AUD or a reserve currency.
- Ensure you have accurate information
Given that information is paramount when conducting business overseas, you’ll want to connect with accurate and reliable foreign exchange data sets. For example, OANDA offers an Exchange Rate API so rates are automated with the exact data companies need, when they need it. Make sure your forex data provider offers a reliable flow of accurate real-time spot and forward FX rates, providing everything you need to make an effective FX trading decision. This will not only make it much easier to track and transfer foreign currencies, but level the FX playing field so you can benefit from currency swings in your favour.
- Keep transactions in widely-used currencies
To reduce risk, SMEs should invoice overseas business partners, suppliers and customers in larger currencies like the US dollar or the euro. This both reduces currency volatility and paves the way for overseas clients to grow more accustomed to dealing with major global currencies, which further eases the burden of FX risk for smaller companies.
- Be more aggressive about FX hedging
Working in tandem with foreign exchange specialists, small and medium-size domestic businesses should seek out opportunities to purchase foreign currencies when rates are in their favour. This gives companies a valuable hedge against weaker foreign exchange rates.
With proper strategies in place to mitigate foreign exchange risk, SMEs can not only limit losses, they can also open up a host of opportunities overseas. This may even enable them to profit from FX volatility in some cases. As such, it is essential that you create a blueprint outlining what FX risk means to your company, while establishing crystal-clear risk management goals and guidelines. Seek out experienced financial service providers who are accustomed to dealing with FX rate issues overseas.
Mateo Graziosi is Head of FX Data Services, OANDA, responsible for driving OANDA’s continued growth throughout the local market and with Australian businesses. Mateo has a degree in Business Administration from San Jose State University.