With the rise in international trade, many UK small and medium-sized enterprises (SMEs) are increasingly involved in cross-border transactions. While this offers growth opportunities, it also exposes SMEs to exchange rate volatility.
Impact of Exchange Rate Fluctuations
Exchange rate changes can significantly affect businesses. Importers may face higher costs, while exporters might see their profits shrink or disappear. For instance, a UK company exporting goods to Europe may agree on a sale price in euros, but if the exchange rate changes before payment is received, the conversion back to pounds might yield less profit.
This uncertainty, known as currency risk, complicates financial planning and can disrupt smooth operations.
Extent of the Problem for UK SMEs
SMEs, which make up 99% of UK businesses, are particularly vulnerable to exchange rate changes. Larger businesses have traditionally managed this risk effectively, but SMEs often struggle due to the complexity and cost of available solutions.
A report by Bibby Financial Services revealed:
Average Loss: SMEs lose around £70,000 annually due to currency fluctuations.
Perception of Risk: 51% of SMEs that import and 34% that export view currency volatility as their biggest challenge.
Protection: Only 2% of SMEs use hedging strategies, compared to 92% of Fortune 500 companies.
Increased Awareness
International trade has surged, growing from $12.5 trillion in 2005 to $32 trillion in 2023, amplifying the impact of exchange rate volatility. Brexit has increased currency fluctuations, highlighting the need for effective risk management among SMEs.
Solutions for SMEs
Traditionally, only large businesses used FX hedging to manage currency risk due to its complexity and cost. However, more SMEs are now seeking these tools. Companies like EAKO offer accessible FX hedging solutions designed for smaller businesses, making it easier to manage currency risk.
FX Hedging Tools
Forward Trades: Lock in an exchange rate for a future date to avoid uncertainty. This guarantees the rate at which currency will be exchanged, providing stability for future transactions.
Option Trades: Allow flexibility by offering a guaranteed minimum rate while also giving the option to benefit from favourable exchange rate movements. This tool helps businesses hedge against unfavourable rates while retaining the ability to capitalize on beneficial changes.
Current Usage of FX Hedging
Despite the availability of FX hedging tools, adoption among SMEs is low. A 2017 Bibby Financial Services study found:
90% of SMEs only use spot trades.
28% use forward contracts.
Just 7% use option contracts.
Summary
Exchange rate volatility has increasingly impacted UK SMEs, leading to significant losses. The rise of accessible FX hedging tools like those offered by EAKO provides SMEs with opportunities to mitigate this risk effectively. By utilizing these tools, SMEs can protect their profits and manage costs more predictably.
Comments