4 Tips To Manage Home Currency Strength, Weakness & Volatility

When a company’s home currency goes through a sustained period of strength, weakness or volatility, they may wish to change strategy to protect their profit margins. Let’s take home currency strength as an example. While it may be good news for holidaymakers, many companies that export overseas will be hit by losses from the negative impact on foreign exchange rates as they convert money from international customers and subsidiaries to their home currency. A good example is Europe’s Airbus Group. Airbus’ costs are nearly all in euro, as they are based in Europe. However, their client payments are predominantly completed in US dollar. Airbus therefore have to convert their profits into euro, which is a costly process. We look at 4 ways to best protect your business in times of home currency strength, weakness and volatility.Managing strong home currency1) Exporters will likely be hit hardest, and must face a choice of either absorbing a probable loss of custom or adapting their business by lowering their prices. After all, as far as the customer is concerned, they are paying a lot more for the exact same product as they did before the currency’s gains. It is advisable to lower prices in the short term, preparing for shorter profit margins, rather than lose a client altogether by demanding the same home currency price. Long-term relations are what matter to a business. Furthermore, clients will appreciate UK exporters’ efforts to accommodate their clients in challenging circumstances. Relationship-building is what makes a business thrive in the long-term.2) As the home currency has greater buying power when strong, companies that import to the currency’s home country will see increased savings on orders, or may choose to take advantage of the currency’s strength in order to bulk-buy, in case the market moves against them in future.Exporters can also take advantage of the strength of their own home currency. Every cloud has a silver lining, so to speak. Companies can use their buying power in times of home currency strength to improve other areas of their business by investing capital in foreign services or products. Who knows when the currency will be so strong again? This is an opportune time for businesses to improve technologies, facilities or in foreign market expansion investment, for instance.Managing weak home currency3) With a weak home currency, essentially inverting what one would do with a strong home currency is advised. It is a time to maximise sales abroad and take full advantage of your selling power to international customers. If importing, first of all ask your suppliers if they would consider amending their price as your home currency is weakening your buying power and affecting your profit margins. If this is not successful, you could then consider changing suppliers or, if possible, consider focusing your efforts on areas of your business that do not require importing.Managing volatility4) With increased volatility in exchange rates that you operate in, increased hedging is especially crucial. Hedging will take away the risk of volatility in the exchange rate. There are businesses that take a risk on the exchange rate, as it may very well rise. However, such a strategy for an SME is dangerous and foolish. If the rate were to plummet unexpectedly and your business did not hedge through a forward contract, for instance, what would be the impact on your business? In many cases, it would mean profit margins being wiped out, debt accumulation and possible layoffs.Think long-termExtreme changes of any kind to a home currency’s stability and price often sound the alarm bells for businesses. However, in taking a long-term view, rather than micro-managing each period of currency fluctuation, a business will be much better off. Retaining customers in such challenging times is paramount for a business’s long-term future. Such a time should also be taken advantage of where possible, in optimising import operations and focusing elsewhere on business improvement.