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Last updateFri, 24 Mar 2017 12pm

 

Scottish Referendum: A weak pound needn’t mean disaster for the UK’s importers

 

Independence


With polls suggesting the Referendum is running a tight race, no one can predict the outcome of Thursday’s vote. However, with a sophisticated FX strategy in place, CFOs can ensure that their margins are protected, no matter which way the vote goes.

In just a few days, the watching world will discover exactly what is the future of the Union, the marriage between the United Kingdom and Scotland. Will Scotland continue to be the northernmost reach of Great Britain, or will our northern neighbours wake up on Friday in a newly independent nation?

While the campaign for and against independence has dominated the news over the last month, until now, most business owners probably hadn’t seen a direct impact on their affairs. This has been swept away, however, following the news last week that the Yes vote for independence had temporarily crept into the lead for the first time since polling started. Since it was reported by media outlets, this news caused the pound to slump to a 9 month low, and Morgan Stanley has estimated that GBP could fall as much as 10 percent if a majority of Scots vote Yes.

Currency fluctuations such as these can see companies suffering profit dips if the CFO doesn’t have a sophisticated FX policy in place. CFOs within enterprises should start to consider how they can actively anticipate and plan for fluctuations in foreign currencies through a hedging strategy.

This should definitely not be considered a one-off, ‘tick it once and it’s done’ exercise, as it requires regular assessment (at least once a year) of exposure to risk – which should be calculated by both the CFO and the senior management team in tandem. Pooling their knowledge, this group must calculate their exposure, margins, profitability of the business and risk tolerance to establish a coherent FX policy. By approaching this exercise in this way, the end policy should be empirical rather than emotional – a decision based on real numbers and excluding optimism.

Specifically, many companies that import products from overseas to sell on to their customers could be hit by losses due to unfavourable foreign exchange rates, as they have to pay more to their international suppliers.

One option for importers will be to pass on the impact of the pound’s slump to their customers, hiking prices for the end user. As it stands, the UK’s economy appears to be improving, and some may feel that this is the best time to increase prices to protect their bottom line. Customers might not appreciate this, however, for as far as they are concerned, they will be paying a lot more for the exact same product as they did before GBP’s plummet. They may decide to blame the company, rather than the weak pound, for their misfortune, and take their business elsewhere.

In the short term, CFOs should advise their companies to keep prices stable. Importing companies may have to accept shorter profit margins, to keep long-term customer relations happy and healthy. Furthermore, UK customers could well appreciate UK importers’ efforts to accommodate their clients in challenging circumstances. Make no mistake - relationship building is what makes a business profitable and sustainable in the long-term.

With GBP falling against other currencies, companies that export to the rest of Europe or further afield could see increased take up of their products, which will prove cheaper for foreign companies or consumers to buy. Companies that have focused their business model on importing could explore ways of selling to other territories – other Eurozone countries, for example. Who knows, this could be good practice for the eventuality of Scotland becoming a sovereign territory!

With polls suggesting the Referendum is running a tight race, no one can predict the outcome of Thursday’s vote. However, with a sophisticated FX strategy in place, CFOs can ensure that their margins are protected, no matter which way the vote goes.

 

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