International trade is lucrative, but it also carries significant challenges. One of the most significant that many small businesses struggle to deal with is currency risk.
Australia may seem like a distant island with its own robust economy, but the Aussie dollar is frequently vulnerable to overseas influences. The recent crisis in Europe with Greece possibly pulling out of the euro has affected currencies worldwide.
Foreign exchange volatility is high and can badly damage your bottom line – even drive you out of business if you are highly exposed and the rates turn against you. Here are some practical steps you can take to manage your FX strategy.
A forward contract is a hedging tool that allows you to lock in your rate now and deliver your funds at some point in the future. It provides protection against the value of the currency moving against you in future.
You don’t have to hedge all of your currency exposure. You may want to take advantage of potential upside if the rates move in your favour. You can do this with a spot contract. Taking a portfolio approach with a combination of hedging tools helps balance your forex risk.
This may depend on your industry and your type of business, but some suppliers may be open to price negotiation. It depends also on your bargaining strength with trading partners. But should the value of the AUD or the currency you hold fall significantly, there may be some room to negotiate.
Make payments in other currencies
Some currencies, such as the Swiss franc, are more volatile than others. The Swiss franc suddenly strengthened by 40% in less than an hour after the Swiss National Bank decided to remove the EUR/CHF cap. Trading in EUR or USD instead can make for a more stable situation.
Re-adjust your prices
If you’re an exporter, raise your prices. With the Australian dollar falling your goods are already cheaper in overseas markets so customers should be able to bear a rise. Or price your goods in the destination currency and reap the benefits of higher returns when you convert back to AUD.
Shop around for better rates
It may seem convenient to go with your bank, but for smaller businesses in particular it’s rarely competitive. Just by shopping around to specialist providers you could save up to 5% on rates, which may be enough to offset the latest fall in the currency. Check that an alternative provider offers consistent rates, and isn’t luring you in with special bonus rates that will later shoot up after you’ve made a few transactions.
Any company who wants to go global needs to develop a solid FX strategy. It protects both your profits and your global reputation, and is critical for international trade.