TREASURY MANAGEMENTWhite Paper | October 2017

Running a business - any business - can be extremely difficult. First you have to find the customers, then win them over, then fund and grow the company, then effectively manage the process from beginning to end. So, given all of the hard work involved, imagine the frustration of seeing the forecasted profit margins - gross and net - being eroded by exchange rate volatility, especially if the currency risk is manageable. That frustration will deepen if it turns a profit into a loss.

The devaluation of sterling in recent months has had a

significant negative impact on the sales margins of many

UK businesses. It is therefore quite surprising that many

of them do not actively manage their currency risk.

Indeed, many corporates we speak with consider their

foreign exchange (FX) risk at the end of the process as

opposed to the beginning. Considering how important

managing FX risk is to those doing international

business, the exchange rate risk should be thought

about from the start.

TREASURY MANAGEMENT

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“The proactive relationship management that we enjoy

from Smart is refreshing when you are used to

encountering FX companies who are all about getting

your business but who have no interest in dealing with

you in the professional, efficient and accessible way

that the Smart team do.”

MATTHEW SIDENHAM

IMAGRO

info@smartcurrencybusiness.com | 020 7898 0500

IMPROVED UNDERSTANDING LEADS TO MORE INFORMED DECISIONS

One of the key reasons managing FX risk is one of the last considerations for UK businesses is a lack of understanding or access to the right kind of information. The current political and economic climate we find ourselves in is more uncertain than it has been for some time, which has brought the potential ramifications of currency movements to the fore.

One only has to look at the disparities between what

the major banks are forecasting over the next 12

months to appreciate that nobody really knows what

is going to happen in the short term. The uncertainty

over Brexit has hardly helped matters and it shows no

signs of abating any time soon. Equally, Donald Trump’s

presidency to date has been unpredictable which has

caused huge volatility in the US dollar. In fact, it is fair to

say that the markets are currently being driven more by

political events than economic data.

With the above in mind, this white paper is designed

to explain the importance of effective currency risk

management and how it can mitigate the potential

losses to your margins and, subsequently, your bottom

line. Ultimately, such losses can impact on your

business’s cash flows and impede business growth.

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“Our business is extremely varied. We have had many

different challenges with the fluctuating nature of currency over the last few years. I think

we have come out about even which is pretty amazing

given we haven’t put much effort into it. Now we have

decided to take the risk out completely by using Smart.”

ROBIN COPESTICK

COPESTICK MURRAY

info@smartcurrencybusiness.com | 020 7898 0500

MITIGATING RISKS TO BUSINESSES WITH FX EXPOSURE

What, then, is currency risk? The term essentially alludes to macroeconomic conditions, such as government policy, and political and economic uncertainty, that affect currency movements. If a business only ever made and received payments in a single currency, then such movements would not result in currency risk.

However, an increasing amount of UK businesses have foreign

currency exposure, so the constant fluctuations between one

currency and another have real impacts on the cost of business.

Obviously, if the markets move in your favour, then this presents a

potential profit opportunity but, on the other hand, if they don’t,

your business stands to be negatively affected.

For instance, the pound’s weakening against the euro since the

Brexit vote has made many exports from the UK cheaper because the

pound is less valuable than it was. Equally, goods imported from Europe

and the rest of the world are now more expensive. Any UK companies

importing and exporting are therefore at the mercy of the gods.

Let’s say that your business has agreed to pay €1,000,000 for the

purchase of goods imported from Europe in the next six months. At

the date of contract, the exchange rate is £1/€1.14, meaning you will

have to pay almost £880,000 to purchase €1,000,000. Then, six

months from now, you find that the euro has strengthened against

the pound and the exchange rate is now £1/€1.08. Now you will have

to pay just over £925,000 to fulfil the terms of the contract. That’s an

additional cost of £45,000 which must either be passed on to your

clients, or has a direct impact on your profits.

Of course, if the euro weakens against sterling then you stand to

pay less for the purchase of the goods, but therein lies the risk.

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“RISK COMES FROM NOT KNOWING

WHAT YOU’RE DOING.”

WARREN BUFFETT

info@smartcurrencybusiness.com | 020 7898 0500

ACHIEVING A DEFINITE CASH FLOW

Currency risk management should not be thought of as a means to improve your existing cash flow. FX should never be seen as a revenue stream. Instead, we recommend a strategic approach to achieving a definite cash flow. So, irrespective of which way the currency markets move, you can be assured that you have enough to meet the obligations of your business and, in turn, help grow your business.

Many of the people we speak to think of hedging tools as

a convenience, whereas they should be thought of as a

tactical approach to locking in future exchange rates. All too

often the focus is on rates, which is why we try to work with

our clients to strategically manage their FX exposure.

We have seen countless incidences when a market has moved in a

client’s favour only for them to say they believe the positive movement

will continue. Equally, there are times when the currency markets

move against a client but they believe that the trend will be bucked

before long and they will recoup their potential losses.

We never tell our clients what to do. Instead, we work

closely with them to better understand their unique

situation. Only then are we able to offer guidance

on the nuances of currency risk management,

so they can make informed decisions in the

context of their business’s situation and

how that relates to that of the markets.

5info@smartcurrencybusiness.com | 020 7898 0500

BESPOKE BUSINESS SOLUTIONS TAILORED TO YOURS

We could sit here, list several possible scenarios, then provide theoretical solutions to those theoretical problems. However, we have decided not to as it would detract from one of the key messages we want to convey in this white paper - that currency risk management can never be a one-size-fits-all process.

Each and every business is unique, their situation is unique and

their requirements are unique - strategies that work for one would

not necessarily work for another. But there will always be a solution,

something your business can do to mitigate its currency risk.

Do you have any loans that need to be considered, both now and in

the future? Are you able to change your prices as currencies fluctuate?

Can you pass the additional costs on to your customers or will they

hit your bottom line? If you’re a travel company, for example, and you

have printed 20,000 copies of a brochure for next summer that lists

the prices, can you afford to do another print run with revised prices

or will you have to grin and bear it? Then there is the possibility that

passing the costs on to your customers will lead to a dip in sales. It is a

delicate balancing act and there are no hard and fast rules.

If you have a 3% margin and there is a 3% swing in the market then,

clearly, you are going to take a massive hit. If, on the other hand, you

have a 30% margin a 3% swing isn’t all that bad. But it still represents

10% of your margin and there will be a solution for that situation, albeit

one that is different for companies with a 3% margin.

Ultimately, if you are a business that has dealings in foreign currencies

then doing nothing is a mistake. But what you must do is entirely

dependent on your business’s situation. Having foreign currency

exposure is not about gambling, it is about managing risk.

6info@smartcurrencybusiness.com | 020 7898 0500

“ALWAYS REMEMBER

THAT YOU ARE ABSOLUTELY

UNIQUE. JUST LIKE

EVERYONE ELSE.”

MARGARET MEAD

TREASURY MANAGEMENTWhite Paper | October 2017

FURTHER INFORMATION

For further information on how Smart Currency Business can help protect your profits and expand your products and services internationally, email us at info@smartcurrencybusiness.com or give us a call on 020 7898 0500.