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Strategic Finance

Currency matters

Monday, 27 November 2006

Nick Bull looks at how specialist foreign exchange companies can help organisations of all sizes do business abroad. The world is changing. Not so long ago, the concept of a 24/7, 365-day-a-year global business cycle was inconceivable. But with hi-tech systems developments, deregulation in global financial markets and today's ability to move currency around the world at the click of a mouse, the way we do international business has been transformed beyond recognition.

But, while there are manifestly sound commercial reasons for opening up your business to wider frontiers, as a finance director you will be only too aware there are also concomitant hazards that can make a serious dent in profits.

No business wants to lose money - especially when those losses are incurred because of market forces beyond the control of even the most far-sighted of finance directors.

So what is to be done? Veterans of the international trading world will almost certainly cite currency fluctuations as one of those onerous inevitabilities that can destabilise even the best-laid business plan.

Pause to think about it. Currency movements of five per cent to ten per cent over a short period of time are not uncommon in today's business environment. Such fluctuations could easily mean the difference between making a profit and a loss on an overseas contract or payment.

This is where specialist foreign exchange companies can make a big difference to the bottom line. Dealing specifically and often exclusively in the area of foreign exchange, such companies can help a business improve profitability, avoid risk and gain a competitive advantage within their respective industries. A range of solutions is on offer that can limit your company's exposure to foreign exchange risk.

It is worth bearing in mind, with many overseas debtors granted longer credit periods due to increased shipping times etc, it can be difficult for a company to minimise the time they are exposed to such fluctuations.

So, how can you mitigate the risks? There are many approaches and, with the right guidance, you can easily navigate a profitable path through the minefield of international trade and the attendant currency risks.

Your first port of call should be a well-regarded foreign exchange provider. Acting as an integral member of your financial team, the provider can advise on a wide range of strategies available to minimise risk. In other words, this third-party expertise should effectively double up as an in-house function.

Ways to protect your business

Let's examine some of the methods by which you can protect your business from exchange rate fluctuations.

Entering into a foreign exchange forward contract with your bank or foreign exchange provider is essentially a way of developing an agreement for you - the client - to deliver a pre-defined amount of currency on a specific future date, or between two dates of your choice, to be converted at a fixed exchange rate.

When you receive your foreign currency sales receipts, they are converted at the fixed exchange rate as agreed in the contract. This form of hedging works equally well for businesses that have to settle foreign currency invoices, as they are also able to enter forward contracts with their supplier to buy foreign currency.

The beauty of it is that contracts can be custom built to your requirements. For example, you may want a contract that allows you to make part payments up to the value of the contract rather than wishing to make one large exchange. A reputable foreign exchange specialist will dovetail the demands of the contract to help it work to your advantage.

Foreign exchange specialists can also be invaluable when arranging stop loss orders and limit orders. The former allows clients to set a minimum level at which currencies are bought or sold, and are eminently suitable for businesses wishing to protect their bottom line, while allowing for the market to move in their favour.

Choose a limit order and you will have the flexibility to set a higher target exchange rate at which, if the rate is achieved, the currency will be purchased. This option is suitable for businesses that have funds to transfer and are looking to make the most of any favourable currency movement that occurs.

Currently, around 80 per cent of small to medium-sized enterprises in the UK use their business bank for foreign exchange transactions without considering other foreign exchange suppliers. But looking beyond high street business banking arrangements could bring tangible gains.

Ship-shape for business

One example of a business benefiting from choosing a dedicated foreign exchange specialist is the case of an emerging London-based ship brokerage. The company, which has recently expanded its portfolio to include commodity brokerage, brings together owners and those who want to charter tankers to arrange transportation of crude oil and petroleum products across the globe.

As a shipbroker, the company receives its commission payments in US dollars and then converts them to sterling in order to pay for administrative costs such as office overheads and wages. As it does not have to match invoices it is flexible as to when it trades currency and looks to achieve the best rates by way of sharp prices and timing. This translates into a requirement to sell between £150 and £300k of US dollars on a monthly basis.

The benefits of using a foreign exchange specialist soon became apparent. On its first trade, comparing spot prices, the company saved $1,500 on a $175k sale of US dollars into sterling. Now an ongoing client, the business is regularly updated by dealers and kept fully abreast of major market moves, changes in market sentiment and key data releases all of which could have a significant impact on the company's bottom line.

Small businesses

Too many business banks do not offer SME customers the same rates or level of service when it comes to serving their foreign exchange requirements as they do bigger corporations. Often, a business bank will put smaller companies' trades through at the end of the day, regardless of whether the timing is favourable.

But come to a reputable foreign exchange supplier and you will enjoy direct access to your own personal trader who will be able to give you information to help you decide when would be a good time to trade.

Nick Bull works for commercial foreign exchange provider Moneycorp. For more information, visit the website www.moneycorp.com