Not only is the foreign exchange one of the most lucrative financial markets in the world, but it’s also arguably the most volatile. This is true even at the best of times, but it’s fair to surmise that currency fluctuations have been even more pronounced of late, as the geopolitical climate has become increasingly fraught.
Make no mistake; the last two years have triggered huge peaks and troughs in major currency pairing, with the Brexit vote and the election of Donald Trump as U.S. President providing catalysts for significant economic upheaval.
But how exactly do currency fluctuations impact on SMEs in the UK, and what’s the outlook for companies in the current climate?
1. They Impact on Profits
If you’re a forex trader who regularly executes orders through sites like Oanda, you’ll know that constant currency fluctuations have a direct impact on your profitability.
The same is true for businesses, particularly those that trade abroad and accept a host of global currencies before exchanging these into pound sterling. These SMEs are therefore extremely sensitive to currency fluctuations, which can make it difficult for them to make accurate financial projections during each quarter.
Not only this, but these fluctuations can also impact on the amount that you bank each financial year, creating a challenging business model that makes it hard to achieve sustainable growth over time.
2. The Cost of Imports and Exports
If the value of your business’s domestic currency declines, you may notice an increase in exports and the volume of products that you’re able to sell across the globe.
This is because overseas customers and clients will be able to exchange their own currency at a far more competitive rate, enabling them to convert this for more and purchase a higher volume of products with their usual spend.
Conversely, a weakening of your domestic currency sends the cost of importing goods and raw materials soaring, which may impact on your ability to manufacture or stock products at the same rate.
This can be extremely detrimental over time, as it restricts your core ability to do business and generate revenue.
3. Holding Currency and Avoiding Transaction Fees
If your business regularly converts one currency into another for the purpose of international trade, you may find your venture at the mercy of foreign exchange transaction fees.
So, even if you can benefit from a favourable exchange rate, transactions fees can accumulate over time and gradually eat in to your hard-earned profits.
There are ways to negate this issue, however, as you can identify specialist companies that focus on providing free or affordable currency exchanges to commercial entities.
You can also look to exchange money in bulk to create a holding in USD or a similar currency, in a bid to avoid forecasted price increases and the impact of constantly fluctuating values.