How startups and SMEs can mitigate currency risk

Even if you don’t have an overseas operation or sell directly to international customers, you may be importing goods or services or working with suppliers and vendors with overseas connections, which can leave your organisation vulnerable to FX risk and significantly reduce your profit margins.

And given the recent spate of global trade wars has significantly increased volatility in the currency markets, now more than ever small companies need to be aware of risk associated with currency movements and understanding how to mitigate that risk while limiting losses.

By implementing an effective foreign exchange risk management strategy, your company can minimise FX exposure, limit foreign exchange losses and better manage the unpredictability of the currency markets.

To avoid incurring an unexpected black hole in your balance sheet, you should consider these five practical steps to managing your FX strategy.

1. Calculate risk exposure against profit potential

As a small or mid-sized company decision-maker, is it worth your while to expose your firm to foreign exchange risk? That's a fair question to ask.

If you're primarily making smaller payments overseas, the need for a substantial FX risk program is relatively low.

Yet if foreign exchange transaction activity is high, you'll need a strong risk and volatility FX campaign in place, if only to accurately gauge the downside of rates decline against your currency position.

2. Mitigate risk outside the FX market

Smaller companies can reduce FX rate risk and volatility by hiking costs for their goods and services in foreign markets.

They can also curb potential downside risk by reaching out to international business partners and customers and asking to transact in a different currency, such as USD or a reserve currency.

3. Ensure you have accurate information

Given that information is paramount when conducting business overseas, you'll want to connect with accurate and reliable foreign exchange data sets.

Make sure your forex data provider offers a reliable flow of accurate real-time spot and forward FX rates, providing everything you need to make an effective FX trading decision.

This will not only make it much easier to track and transfer foreign currencies, but level the FX playing field so you can benefit from currency swings in your favour.

4. Keep transactions in widely-used currencies

To reduce risk, SMEs should invoice overseas business partners, suppliers and customers in major currencies such as the pound, US dollar or euro.

This reduces currency volatility and paves the way for overseas clients to grow more accustomed to dealing with major global currencies, which further eases the burden of FX risk for smaller companies.

5. Be more aggressive about FX hedging

Working in tandem with foreign exchange specialists, small and medium-size domestic businesses should seek out opportunities to purchase foreign currencies when rates are in their favour. This gives companies a valuable hedge against weaker foreign exchange rates.

With proper strategies in place to mitigate foreign exchange risk, SMEs can not only limit losses, they can also open up a host of opportunities overseas. This may even enable them to profit from FX volatility in some cases.