A little forward thinking goes a long way

As New Year currency movements have already proved volatile, Currency Specialist Charles Purdy, explains how UK businesses could save money and reduce risk over the year ahead

When considering how volatile exchange rates have affected UK business at the start of 2011, it’s worth considering three currencies in particular, the US$, the euro and the Australian dollar.

The exchange rates of these currencies play a significant role in the fortunes of many UK businesses, in particular those making or receiving international payments.

For such companies, the fluctuating exchange rates which kick-started 2011 will have had a significant affect on their business. What, for example, would your business have received – or had to pay out – if you were exchanging £100,000, this January?

Let’s start with the US$. During January 2011, the US$ moved from US$1.542/£1 at the beginning of the month, to US$1.612/£1 towards the end of the month.

So, if your company were buying £100,000 of US$ this January you could have received a minimum amount of US$154,200 or a maximum amount of $161,200 – a difference of US$7,000.

Ensure a healthier bottom line
For any UK business making regular international payments, such a significant difference could go a long way towards ensuring a healthier bottom line. It could even be used to invest in additional goods, to be resold at an even greater profit.

As for the euro, January was certainly a time of ups and downs. It hit a low around €1.16/£1 at the start and end of the month, however mid-month, following the release of higher than expected inflation figures, sterling strengthened to above €1.20/£1.

That means, the maximum amount your company could have received for your £100,000 was €120,000 and the minimum €116,000 – a difference of €4,000.

With regards the Australian dollar, from A$1.520 at the start of the month, to a maximum when sterling hit a high of A$1.615 towards the end of the month, the difference was A$9,500.

Put simply, in just 31 days, UK business saw sterling gain and lose 4.5% against the euro, gain 4.5% against the US$ and gain just under 6% against the Australian dollar.

Stay ahead of the game
For many UK companies paying overseas suppliers for goods or services rendered, or receiving funds from overseas clients for goods or services supplied, the significance of such currency movement cannot be underestimated. Especially, considering just how quickly margins can be squeezed.

Bearing this in mind, if you want to stay ahead of the game against your budgeted exchange rates during this period of high volatility, it may be wise to secure some of your future currency requirements now. Fortunately, this is easily achievable using a ‘forward contract’.

With a forward contract, you can agree to buy a certain amount of currency at an agreed, fixed exchange rate, within an agreed period. Not only does this afford your business a greater degree of certainty when it comes to international payments, it could help you save thousands of pounds on future transactions.

Consider the following example: your company has committed to buy goods from China, at a price agreed in US$s, the total cost of which is US$1million. Payment is to be made in stages over the next four months, and you have budgeted to buy the goods at a rate of US$1.55/£1.

Using a forward contract, your business could secure the US$1m at a rate above US$1.61/£1 for the four-month period. That way, instead of the budgeted cost of £645,160, your company would save £24,000 – a saving which could make a significant contribution to your bottom line.

Save thousands of pounds every year
The lesson to be learned from January’s volatile currency movements should be clear to any UK business making or receiving regular international payments – a little bit of forward thinking could mean saving your company tens of thousands of pounds every year.

If now is the right time for your business to start thinking about a forward contract for your international payments, consult one of Smart’s Currency Specialists today on 0207 898 0500 or go to the website at: http://www.smartcurrencybusiness.com/