In her announcement yesterday, Theresa May has said that Britain “cannot possibly” remain within the European single market – the clearest sign yet that the government is pursuing a “hard” Brexit. While this will inevitably bring challenges for many small and medium-sized businesses, this announcement and the confirmed timetable for Brexit should encourage those that have been delaying doing so, to take action.
The main challenge facing many businesses in the months ahead is likely to be continued exchange rate volatility. Recent flash falls in the value of the pound have demonstrated how significantly rates can alter; making it difficult for businesses buying or selling goods in a foreign currency to know whether their activity will return a profit or not.
To avoid losing out, businesses should take steps to minimise their exposure to currency-related risks by re-assessing their supply contracts and hedging against currency fluctuations.
Businesses should avoid trading currency using spot rates and look at other financial instruments such as forward contracts. In the current climate, lenders are generally happy to help businesses secure such forward exchange contracts based on pre-agreed terms, for a defined period of time.
Whilst these contracts will incur bank charges, buying currency ahead of schedule and fixing exchange rates removes uncertainty in the short term and enables business to plan ahead in the knowledge that margins are protected. This in turn means that pricing strategies can be set at the right level.
If goods sourced from overseas are getting more expensive, businesses should also take steps to re-negotiate supply contracts and consider alternative sourcing strategies. In some cases, it may be possible to alter the terms of existing supply agreements to allow raw materials to be purchased in euros or dollars – the same currency as products are being sold to the marketplace – effectively nullifying the impact of exchange rates. In other instances, it may be possible to agree that invoices are raised in the supplier’s own currency.
When re-negotiating supply agreements, it is worth remembering that introducing more certainty to the partnership is in both parties’ best interests. If the customer wants to be sure of a reliable source of quality goods, they will be prepared to meet you half way by allowing you to amend the terms of the contract. They may also be prepared to share the burden of any increased costs.
Planning to invest in uncertain times is a particularly high-risk activity and yet this is precisely what some businesses must do to continue to drive profits. The UK’s manufacturing sector is currently experiencing strong growth, mainly due to the low value of the pound, which is boosting export activity. However, a strong order book is creating challenges for some businesses by putting pressure on capacity and forcing them to consider investing in new plant or hiring more staff. By hedging to secure their short-term trading futures as far as possible, these businesses will be in a better position to make investment decisions.
As Britain’s Brexit plans become clearer, businesses trading internationally must react by reassessing trading agreements and using forward exchange contracts to secure their future profitability. Acting now to improve their treasury management will mean they are better placed to make important business decisions and react to opportunities as and when new trade deals are struck.
Source: Salvador Amico - Menzies LLP