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Currency volatility tax calculator Currency Volatility

What with the EU referendum last year and the General Election’s Hung Parliament, there’s been plenty of uncertainty around, particularly when it comes to the GBP exchange rate.

In the 10 months following the June 2016 referendum when the pound peaked at 1.49 against the US dollar, the GBP then depreciated by (18%). Although it has recovered to a degree, it has yet to return to those heady heights. Since April 2017 when the snap election was called, the pound’s value versus the Euro has spiralled downwards by 7%.

But how does currency volatility affect you and your business?

If not managed properly, adverse currency exchange movements could potentially wipe out any profits you make from export sales. Conversely they could increase the amount you’re having to pay suppliers.

Continued uncertainty surrounding the pound has changed the way many SME owners manage currency risk and the way they are doing businesses internationally. Many small businesses (particularly those with exports) view currency volatility as the largest threat to managing currency risk.

Some are looking at increasing the pricing of their services or products. Others are re-negotiating contracts with suppliers or more actively managing their exchange rate risk.

So, what can you do about it? And how best to protect yourself and your business?

 

Here are three ideas to consider:

1. Assess your exposure – Know whether it’s worth pursuing a policy to manage currency risk.  If you’re only making small payments, it’s probably not worth it. But for larger payments,  be aware of what you stand to lose if rates move against you.

 

2. Enter into financial instrument contracts to “hedge” the exposure.  A hedge means that you are creating a profit or a loss that cancels out your currency exposure.

 

3. Pass the risk on, if you can – by raising prices or asking overseas clients or suppliers to pay or receive in a different currency.

Understanding currency risk is not straightforward. If you need help, please get in touch.  We also have specialist broker contacts who can help you manage your risk.

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