Understanding Exchange Rate Risks (+ how to reduce yours)

Business operations are a fine-tuned machine. From shipping and courier arrangements, to supply chain management, regulations, growth strategy and beyond – there are a wide array of logistical and practical factors that go into running a successful company.

Including understanding and reducing risks to your financial forecasting and profitability. Risks such as exchange rate fluctuation.

Exchange rate fluctuation is a result of economic shift, whatever the cause of that may be. But while some fluctuation is perfectly normal, consistent inconsistency, as it were, can present serious challenges.

So here’s what you need to know about exchange rate risks, and how to mitigate your own.

Why the risk?

There are a vast amount of benefits to an ever-expanding global market, particularly for SMEs. Tapping into an international pool of customers, clients and vendors means tapping into more opportunities and more profits too.

Of course, the downside of a more connected market is that your business is more susceptible to being affected by the economic performance of countries outside of your own, including through currency performance.

Summarised simply: weak or volatile currency can easily lead to massive fluctuation in exchange rates, which in turn can result in significant risk to your operations and financial forecasting.

Imagine you’re trading in a country where the currency suddenly changes status, and drastically. This will alter your exchange rate, and can result in massive transactional loss, translation loss, and undue exposure to your operations and supply chain.

How serious is the risk?

There’s not a one-size-fits-all answer to this, but it’s important to note that exchange rate risks can, in fact, have long-term impact.

The knock-on effect such a risk can have on a business’ operations can present through your vendors or partners, through your products or design, through your service, or anything else for that matter.

A simple way to think of it is like a game of dominoes. Without mitigating strategies against exchange rate risks, you could see one or more of those dominoes fall, and you’re faced with a gap in your operations.

What can be done?

Action over anxiety. Proactive measures over chancing it. In other words: there’s a lot that can be done to help reduce your business’ risk.

1. You may wish to consider a risk-sharing agreement with any vendors or partners you have, whether they’re overseas or in your domestic trading country. It’s precisely what it sounds like, and will mean you can minimise the severity of the impact. Some clauses can also secure a rate of exchange in the first instance. Loop in your compliance and legal teams for the best insights.
   
   
2. Diversification – in many senses of the word. For one, you should consider diversifying the currencies you use. This will help reduce the risk of using only one type of currency, in the event that that declines and the exchange rate suffers. Diversifying your supply chain – such as production and vendors – is also a good idea to enable you to tap into a number of resources should you need to.
   
   
3. Strategies such as currency swaps or matching currency flows also enable you to make the most of exchange rate fluctuation. With Moneff’s international payments, you can sell globally and pay locally, making payments in over 150 different currencies to match the one of your choice. 
   
   
4. Taking advantage of fixed exchange rates is a hugely beneficial step for your business to take, particularly when it comes to protecting your financial forecasting and profitability. 

We’re fortunate to be in a uniquely connected global market, and realising the benefits of trading and operating in any number of different countries, with any number of different vendors and partners.

Unfortunately, this also means being more susceptible to global economic uncertainty, and volatile markets. But with the right measures in place, and consistent proactivity, all businesses can protect their operations and reduce the risks associated with exchange rate fluctuation – and get back to growing their company.