Foreign exchange (FX) is a great way to make a profit for businesses, but only if you know how to calculate and manage risks the right way. Today, almost every business in every sector involves foreign exchange in one way or another. It can be in the form of payments you send to your international …
Foreign exchange (FX) is a great way to make a profit for businesses, but only if you know how to calculate and manage risks the right way. Today, almost every business in every sector involves foreign exchange in one way or another. It can be in the form of payments you send to your international suppliers, salary you transfer to your outsourced team in another country, or a payment you receive from a client across the border. As you already know, every pound you receive in your account that comes from across the border goes through the process of foreign exchange, and it is not only impacted by FX rate and FX fees, but there’s also a constant risk associated with foreign exchange.
Foreign exchange (FX) risks are also commonly known as currency risk, and in simple words, it refers to the possibility that changes in the exchange rates can impact your amount. These risks include transaction risks, translation risks, and economic risks. And all these risks can significantly impact a business. Imagine you are expecting a payment from the US in US dollars. At the time of agreement, the exchange rate is favourable. However, before the payment is received and converted into your local currency, the US dollar depreciates. As a result, the amount you receive in your base currency is lower, making the deal less profitable for you.
These FX risks are not something you can overlook when you’re running a business and moving large amounts across borders as part of your everyday business. Why? Because FX risks can:
Now comes the question, if FX risks can impact business, their pricing, revenue, competitiveness and cash flow, why do businesses still hesitate to manage risk? Let’s explore.
By working closely with businesses and supporting them with FX and risk management services, we have learned a few reasons behind their hesitation towards FX risk management, which are:
This assumption that their foreign currency transactions are too small to focus on FX risk management is the most common reason we have come across, especially among small businesses. While this seems like a reasonable excuse, linked to the common belief that minor fluctuations can only affect large multinational companies with large transactions. In reality, they are not just underestimating scale but also the risk and losses they can face.
Let’s understand this with an example of a business that involves importing materials, but due to small-scale transactions assumes that minor fluctuations won’t really impact their profit, and consequently, they do not prioritise FX risk management. FX risks, even with small exposure, are non-negotiable and even a small movement in rates can wipe away your profit, affect pricing silently or even impact competitiveness. To save your business from these silent losses, you need to have proactive risk management, regardless of your FX exposure.
When a business is dealing with multiple currencies, they often depend entirely on natural hedging, assuming it is enough to save their capital and profit. Natural hedging is no doubt an effective strategy, but not a fool-proof plan, because of high chances of mismatched timing, risk of high volatility of the FX market, and inconsistent currency correlation. All this may resultantly create gaps between inflows and outflows, affecting pricing, contracts and competitiveness.
So, it is crucial to understand that even if a strategy has worked for your business in the past, there’s no guarantee it will work in the future, too. A business stands on calculations, not assumptions. Therefore, relying solely on natural hedging isn’t enough to manage FX risks. A business needs to establish a comprehensive risk management strategy to make sure its money isn’t losing value due to FX fluctuations.
Many companies avoid FX risk management because of another common misconception: hedging is ‘complicated’ and ‘expensive’, perceiving it as an unnecessary financial and administrative burden. Being an FX service provider, we understand where that belief comes from. It is rooted in the complexity of the FX market, where hedging strategies like forwards, swaps and derivatives may seem intimidating, but avoiding FX risks entirely only to avoid complexities can make your business end up in losses.
This brings is to the second common misconception about FX risk management that it is ‘expensive’. Risk management does come with the upfront cost and fees, which might seem like an unnecessary expenditure at the time, but in the long term, it is an investment into the protection of your profits. So, in the volatile currency movements and unpredictable swings, protecting your profit, cash-flow and budgets with strategic plans over gambling on movements definitely makes more sense.
In conclusion, FX risks are often underestimated by businesses because of beliefs like their exposure is small, natural hedging is enough, or management is too complex or costly. However, these are mere misconceptions and can silently erode profit, disrupt cash flow and weaken competitiveness. So, it is highly essential to quantify exposure, choose the right FX risk management solutions and take professional help to find the right strategies and tools that can work for you. Lastly, you can go for a service provider that offers low-cost risk management services and a support team to guide you according to your business needs, providing tailored solutions.
We are a reliable foreign exchange service provider in the UK, trusted by many individuals and businesses every day for everything, including small cross-border payments and large transfers on future dates. We have FX solutions for everyone’s needs, including options like spot trade, forwards, market orders, as well as rate alerts, so you never miss an opportunity to trade on the favourable rate.
If you are also looking for the FX solution you can rely on, we’ve got you covered! Choose Linea Global for all your FX needs. Contact us today!
