The Australian dollar’s sharp drop in recent times should be a warning call to businesses. The kind of currency volatility that we’re seeing represents a major threat to your bottom line if costs suddenly spiral and you don’t have enough to pay overseas suppliers.
Since the Aussie dollar’s peak against the US dollar in July 2011, when it passed $US1.10, the Aussie has lost more than 30% of its value. It has fallen 11.5% over the past 12 months alone. That means to pay a bill of $US100,000 you’d have to dig into your pockets for an extra ten grand.
We saw horror stories like this during the global financial crisis, when the Australian dollar sharply devalued. One importer saw its creditors’ book surge from $2,000,000 to $2,500,000 – a half-a-million-dollar hole like that would rapidly send many businesses into liquidation.
So how can you protect your business against this kind of bill shock? The good news is that there are tools and strategies available to mitigate risk and give you more certainty amid high currency volatility.
1. Plan for risk
Setting out a clear budget for the year, with scenarios based on different exchange rates, will give you a clear picture of the potential threats you face. Don’t forget economic risk: currency movements can affect consumer spending as well, which may fall if prices effectively rise.
2. Remove FX risk where you can
First look at ways to remove or reduce your FX risk. Aligning customer billing cycles with supplier payments is one option.
3. Consider hedging products
Hedging tools such as forward exchange contracts and FX options can help manage your exposure. If your bank won’t offer them, try a specialist provider. Take professional advice when developing a hedging strategy: what tools to use, and whether you should blend a number of different strategies.
4. Foreign currency accounts
Particularly for businesses who both pay and receive money in a foreign currency, it may make sense to have a foreign currency account.
5. Don’t gamble
Unless you know you can afford the maximum losses you may face without your business going under, don’t gamble with your FX. There is no certainty about the future, and even if all currency commentators seem to be in consensus about the direction, they can be wrong.
You can never guarantee absolute protection, and hedging against a fall may mean you won’t benefit from a rise. But burying your head in the sand is a risky approach in itself. Inaction or indecision can be costly.
Many prefer to play the waiting game thinking that there must eventually be a major correction which will save the day. Even if there is one, it may not come in time for your business.