Article:

Managing the Risks of Exporting.

The UK exported £634.1billion in trade over 2018 with 236,000 businesses taking advantage of overseas opportunities. New businesses and SMEs (in particular) are diversifying revenues streams and moving into overseas markets with 6.6% growth YOY. 

The digital revolution has enabled global business transactions. Whilst it can be tempting to jump in feet first, understanding the associated risks allows you to mitigate them, protect your bottom line and grow your profits.

Risk Vs Reward

Vast numbers of UK businesses trade in multiple currencies, both locally and at destination. This regularly involves multiple financial touchpoints throughout the logistics lifecycle. Potential overseas business risks to consider are:

  • Economic risks:
    • High inflation that eats into profit margins
    • Fluctuating exchange rates creating unpredictable profits and losses
    • Exchange controls imposed by governments on the purchase and sale of local currency
  • Commercial risks:
    • Buyer insolvency
    • Contract disputes
    • Late and secure payment
    • Crime and fraud
  • Political risks:
    • Trade embargoes and sanctions
    • Expropriation of assets without compensation
    • Civil unrest, terrorism and war
    • Non-tariff barrier risks, i.e. customs, product, packing and government restrictions

Next, there are false risks, managed risks, known unmanaged risk and unknown risks. One of your businesses’ best defences against export risk is to assess the risk and tailor an appropriate risk management plan. Your risk management strategy goes hand in hand with financial expertise and guidance. This will armour you with accurate and up-to-date knowledge of economic and political events causing volatility and help you combat unknown fees, charges and interest rates. There are key elements that define and help you to understand your risk:

  1. Timing – when do you need to exchange one currency for another? If you have a limited timeframe for exchange currencies it can limit your choices (choices that avoid currency risk).
  2. The amount – How much are you exchanging? The more you need to exchange, the greater the potential risk and need to be correctly hedged.
  3. Margin – What’s your profit margin? The smaller the margin, the higher the need to monitor and manage your currency risk to prevent losses.
  4. Forecasting – How accurately can you forecast? The accuracy of your forecasting will influence your currency strategy.

A dedicated FX specialist will develop your unique risk mitigation strategy, taking into consideration the currencies your customers use, the associated risks of those currencies and country-specific regulations. A specialist can help you to reduce the risks that you are naturally exposed to when you trade in different economies, currencies and governance. Spot Market, Forward Contracts and Market Orders are three of the options available to help you secure the best rate possible. Protecting your FX and managing risk allows for accurate financial planning and can save your business a considerable amount over the fiscal year.

Central FX is a leading foreign exchange service protecting corporate and private clients since 2008. The benefits of exporting and overseas trade can be huge. We help you to get it right the first time and every time.

Get in touch with one of our dedicated FX specialists to find out how we can protect your bottom line.

 

Central FX is authorised by the Financial Conduct Authority (FCA) under the payment services regulation 2017. Our FCA registration number is 565847.