Exchange rates are the price of foreign currency that an amount of one currency can buy e.g. one-pound sterling. An increase in the value of the sterling means one pound can buy an increased amount of foreign currency, meaning you are getting more for the same amount of money. Businesses that import and export goods need to pay close attention to these exchange rates as the value of goods are highly sensitive, chopping and changing with the constant fluctuations. Businesses that trade domestically must also be aware of changes in exchange rates as they will have an indirect impact by virtue of the wider economy. So, how exactly do exchange rates affect a business? We will look at some examples below and click here to see how your business can stay protected.
If you run a business that sells products or services to a country abroad, then a change in the exchange rate will have a direct impact on your bottom line. The force of the impact will be dependent on how invoices are issued. If invoices are submitted in the foreign currency, a risk remains where you will receive less money than expected if the exchange rate moves against you from the time the invoice as issued and date of payment. Issuing invoices in your local currency should have a lesser impact, as the overseas buyer must change their local currency into yours to make payment. You’ll receive the full invoice amount regardless of where the exchange rate sits. The potential risk here is that your prices may become uncompetitive as a result of variations to the exchange rate, leading to lost market share against foreign competitors who do not have to include transactional exchange rate changes.
As with selling overseas, if your business contracts with a supplier from a foreign country, you become vulnerable to fluctuations in the exchange rate. For example, if you purchase goods from a supplier in China and payment of 300,000 Chinese Yuan for your next shipment is due in a month’s time with an exchange rate of 8.74, your invoice would sit at £34,330.83 if paid today. However, in a month’s time when the payment is due if the exchange rate has moved to 8.8, your invoice would change to £34,090.90, meaning you’re paying £239.93 less for the same shipment of goods. Of course, if the exchange rate was to go the other way, you would have to pay more for the same amount of goods. Some businesses put forward contracts that fix exchange rates for a set period in place to help reduce the risk to the business.
Changes in the exchange rate can also indirectly impact your business, even when you do not buy or sell goods and services overseas. For example, if you transport products around the country using delivery trucks and the cost of fuel is raised due to changes in the exchange rate, you will end up paying more for your shipments to be delivered. Exchange rate volatility can also have an effect on competition. Depreciation of your local currency makes the cost of importing goods more expensive, which could lead to a decreased volume of imports. Domestic companies should benefit from this as a result of increased sales, profits and jobs.