It’s important with Brexit on the horizon, but in reality it’s important full stop. Your small business doesn’t operate in a vacuum. Even if you don’t operate outside of the UK you could still be affected by currency changes, due to the overall state of the economy and impacts higher up your supply chain.
The reality is that currencies are always fluctuating. They are affected by politics, stability and economic pressures. Your small business needs to know how to manage these fluctuations. Change is never easy and unpredictable change is perhaps the hardest to navigate.
However, knowing why currency changes affect your business can give you the insight into how to manage them.
Notably, and most concerning, is the impact on your profits. Due to no fault of your own your profits can be at the mercy of currency whims. Many small businesses in the UK saw this in very stark terms immediately following the EU referendum.
This is particularly true if you operate overseas and are therefore acutely aware of exchange rates. You’re doing the same work, charging the same money, but actually seeing less hit the bank account. This can plan havoc with demand planning and forecasting.
Then there is the problem of new work. In a global marketplace, if you’re competing against businesses from other countries with a more favourable exchange rate, how do you bid for work? Your usual methods for working out quotations may lead you into tricky water a few months down the line.
Imports and exports
Obviously currency fluctuations will hit hard when you rely on a global supply chain. This can be both good and bad.
For example, you may find that overseas sales increase because customers are getting greater value for their spending. Of course, the converse is also true. It’s particularly impacting when you are paying your suppliers in a different currency.
The perils of small businesses and currency changes
Then there is the perpetual problem facing small businesses: it is harder to absorb the problems. Larger businesses naturally have a larger buffer zone, meaning fluctuations here and there can be absorbed and will generally even out over time. Small businesses simply feel currency fluctuations more acutely. They can end up very quickly in a situation of needing to rob Peter to pay Paul.
Given that fluctuations in currency are outside of your control you need to do everything you can to weather the situation.
Here communication and preparation are of utmost importance. It may be possible for you to agree with suppliers to operate on a ‘forward contract’ meaning you set your working agreement based on the current exchange rate.
This can give you a degree of certainty but may make you less attractive. You’ll also miss out on the pluses that a favourable exchange rate brings.
Similarly you can look at your contracts and add a clause which allow for renegotiation of prices should the exchange rate move outside a predetermined range. Remember to communicate these carefully.
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We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!