Why now is the time to review the impact of Foreign Exchange on your business

In a guest article Infinity International Foreign Exchange explains why it is a good time to review your foreign exchange policy.

The recent period of disruption as a result of Brexit and Covid-19 has provided business owners the opportunity to take a fresh look at their business; to assess opportunities as well as try to identify potential threats. But have you considered the impact of Foreign Exchange (FX) on your business?  There is a need now more than ever for businesses to be nimble in their FX approach – as well as business and economic uncertainties there are currency market uncertainties to contend with too. 

Infinity International Foreign Exchange, a specialist FX provider, advocates taking a step back and spending the time to identify where FX exposure could arise across your entire business, and to consider possible FX risk arising in various business scenarios.  The aim is to create a currency planning approach with currency conversion and hedging solutions that are aligned to your business objectives with the right level of flexibility to incorporate the business needs and any related uncertainty. 

As part of this exercise, Infinity suggests that you could consider:

  • The extent of your FX requirements

Businesses have been operating through a period of high flux and uncertainty and any currency risk may have changed as a result. It may now have a different – larger or smaller – impact on your business.  It’s prudent to ensure any currency planning approach is still relevant to the current situation in your business and is producing the results you had originally aimed for. 

  • The impact of futures moves on your business

It’s a good idea to ask yourself what a move in the FX rate could mean for your business.  Take the extent of the movement in the FX market in 2020 for example: there was a c13% difference between the high and low GBP/EUR interbank rate and a c17% difference between the high and low in GBP/USD interbank rate over the course of the year – that level of movement is going to have an impact on businesses.

  • How you could manage this change, bearing in mind the need to be flexible in the current environment.

Absorbing this magnitude of change in FX rates could have a negative or a positive outcome for your business.  However, currency planning can help to achieve a degree of certainty on the related costs or revenue.

There are a several questions you might ask yourself as part of planning your currency approach:

  1. Have your currency requirements changed in the last 12 months?  Are they likely to moving forwards?
  2. Consider whether your existing FX strategy has proved an effective strategy to date.  Is now a sensible time to try and mitigate FX risks by looking into hedging, or can you pass FX risk effectively to your customers?
  3. You might have an FX budget rate that you use for planning or contract purposes – is this achievable? What is the impact if you cannot achieve it?
  4. Would you like to try and achieve some certainty over future requirements by locking in the FX rate using a forward contract? Identify how can you align the FX hedge to the timing and the dynamic of the underlying business activity which generates the currency requirement.  Thinking about how confident you are in your cash flow forecasting, will drive how you hedge, how much you should hedge and for what period.
  5. You would also need to consider the forward facility that you are offered by your FX provider, and what are the terms of that.

By taking the time to re-assess your currency planning strategy both in terms of the currency requirements of the business as well as how future FX moves might impact the business you are able to try and take control of some of the uncertainty you may be faced with.  You then have the relevant information to think through a framework for how you might manage those various outcomes and what the related activities should be.  There is comfort in having a plan even if within that there are still a number of variables.

Whether you have one off currency costs or ongoing requirements, now might be a good time to reassess how you manage them. Please feel free to contact Sarah Billingham at sarah.billingham@iifx.co.uk for more information about the support available.

This post is intended to provide you with information on the services Infinity International Limited (IIFX) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. IIFX is a company registered in England with registered number 06333730 and registered address at Building One, Chalfont Park, Gerrard’s Cross, Buckinghamshire, SL9 0BG, United Kingdom. IIFX is authorised by the Financial Conduct Authority under the Payment Service Regulations 2017 (FRN: 567835) for the provision of payment services. IIFX is authorised and regulated by the Financial Conduct Authority in the conduct of designated investment business (FRN: 671108).

Photo by John McArthur on Unsplash

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