You may have noticed that the US dollar has been soaring against other currencies. It's been a chaotic year for foreign exchange markets everywhere, with even previously stable currencies like the euro falling against the dollar. After decades of globalization, even small businesses have fingers and toes in all corners of the world – that means that somewhere along the line, these currency fluctuations are going to have an impact on the bottom line.
For most businesses, small blips or a gradual decrease are easily absorbed. But it's a different story when lots of economic conditions, such as inflation, increasing costs and rising interest rates, slam together to create shocks that make a currency value shift quickly – like when the pound hit an all-time low of $1.03 against the dollar in September. With currencies down and more turmoil to the markets on the way, how can small businesses stay on top of the situation?
Always be prepared
Rob Williams has always been aware of currency fluctuations – he's the director at UK-based clothing manufacturer Hawthorn. Its international supply chain is in dollars, but the company accepts payment only in pounds – the perfect combination to be pummeled by the recent shifts in the market. ‘When the pound dropped overnight recently, all orders that we've just taken on (and need to pay for yarn for) have just cost us more before we've even started production,’ he says.
It's not the first time that Hawthorn has been hit with a surprise currency drop – Brexit was the company's first wake-up call to start monitoring these shifts and take action. As the pound has continued to lose value, the team have taken extra effort to build efficiencies into the business – for example, investing in software to more precisely cut fabric to cut down on waste – which has kept the bottom line steady. While the recent drop could have hit the business hard, the team at Hawthorn had pre-bought US dollars at a rate that they felt would be advantageous – they can then hold this currency with their foreign exchange broker and use it as needed.
‘It's something that we review periodically if we feel that the value of the GBP against the USD is particularly high,’ he says. ‘We'll look at economic signals and things that are coming up and decide whether it's worth pre-buying currency, as this is obviously an investment.’
Small businesses can take advantage of similar strategies like spot transfers (agreeing on a set currency rate and making a payment within two working days) or a limit order (an automatic transfer once the desired exchange rate is reached).
That said, if you're exporting from a country whose currency has just dropped or have a big part of your supply chain not denominated in US dollars, there's a silver lining to these shifts – there's a chance to boost sales or make purchases while prices will convert lower. Brandauer, a UK-based metal-stamping company that exports items like razor blades around the world, saw the dip as a positive, given that its prices seem lower when compared with competitors.
It can also provide opportunities for companies with an international presence to see spending on big costs – such as labor or acquisitions – in a new light. ‘For businesses that pay in US dollars, the UK market presents an attractive opportunity,’ says Richard Mabey, CEO and co-founder at legal-tech startup Juro. ‘Companies rich in US dollars will be able to reward high-performing talent in the UK while keeping costs low. Equally, companies selling into the UK market can still price their services in US dollars, offering an effective hedge against currency fluctuations. It'll be interesting to see whether this situation also extends to M&A [mergers and acquisitions], where UK companies can be bought for proportionately less cash.’
Want to go deeper into forex and other big issues facing small businesses right now? We just launched a six-month email series called Thrive, which focuses on helping business owners navigate the current economic rollercoaster. In your inbox every other Monday – sign up here.
A version of this article was published in the Courier Weekly newsletter. For more insights, analysis and inspiration, sign up here.