How to protect your business profits from the impact of Sterling Fluctuation

Many business owners supplying UK companies  are possibly leaving themselves exposed to fluctuations in Sterling as the currency plummets in value, which could have the potential to wipe-out profits for many exporting SMEs.

Only 12 months ago the euro would have bought you 70 pence. Post-Brexit, and the subsequent 21pc drop in the value of the pound, it is now heading for 90 pence. Irish businesses importing from the UK are likely to welcome a sharp drop in the price of imports from the UK. But Irish exporters are left having to consider strategies to guard against a likely further decline in the pound.

It's very important to consider where sterling is heading? and what exactly that means for your margins. With many businesses working off a profit margin of 10pc-15pc, a 20pc-plus fall in price could push some into the red - thus threatening their viability and jobs.

What's the short-term future of the pound?

Markets are currently pricing sterling to drop to an expected 90 pence, and possibly even parity, by the end of 2016. In recent weeks, Bank of England have indicated that further rate reductions and additional QE purchases may be required if the UK economy shows further signs of a slowdown. One of the first things a business should do if they are sourcing from the UK is to contact suppliers and lock in pricing. With sterling weakening, UK suppliers will look to pass on price rises to Irish buyers as the cost of their own source of materials increase.

What options are available?

If your business is trading with the UK, here are a few options that could allow you to protect your business from currency fluctuations:

Flexible Spot Facility

Similar to a forward contract, a Flexible Spot simply allows you to guarantee today's exchange rates for future currency exchange for a period of typically six to 12 months. Businesses may take the view that it is best to lock in today's exchange rates for a period, i.e. up to 12 months. This way you guard against fluctuation affecting your margins and know today what sterling is going to cost to convert in advance.

The 50/50 Approach

Some businesses will decide that protecting against the full exposure has the same risks as not protecting at all. an approach might be taken whereby the businesses calculates total exposure and protects against half of that.

In this instance above, a business may decide to protect against £450,000 of exposure. The benefit here is that the approach will be neither right nor wrong as you simply balanced your exposure.

Live Orders

A further demonstration of an option open to Irish business is a business that needs to pay £50,000. The exchange rate today is .86 and they feel that it may hit .87 this week, so they request an order for .87.  This order is now placed on the market and will be filled as soon as .87 hits. If sterling strengthens they can simply cancel the live order in the meantime. If .87 lands, the business saves close to €600.

It’s time to act now!

Whatever measure your business decides to take, the message is simple: you need to act now. Those businesses that fail to move in advance of further drops in the pound are likely to suffer from their inaction further down the line.

For further advice on how to protect profits please contact Paul Redmond on 053 9170507 or email paul@rda.ie