UK SMEs threatened by currency risk
– 43% say currency risk presents biggest challenge to international trade
– 8% of SMEs were forced to scale back operations due to FX volatility
A new research report released today by AFEX, one of the world’s largest non-bank providers of foreign currency and risk management solutions, reveals that currency risk tops a list of concerns for the UK’s small and medium-sized enterprises (SMEs) when it comes to international commerce.
AFEX’s second annual Currency Risk Outlook Survey questioned more than 450 financial decision makers at SMEs with international operations about their attitudes towards global trade, foreign exchange risk and their methods of managing it.
The findings reveal that 43% of UK businesses see currency risk as the most significant challenge they face when it comes to conducting business internationally, ahead of finding the right suppliers and customers (31%) and managing payments (13%).
The proportion of businesses citing currency risk as their main challenge has increased from 32% in 2014.
Table 1: Most significant challenges in conducting international business among SMEs
Currency risk 43% 32%
Finding the right suppliers/customers 31% 35%
Making/receiving payments 13% 13%
Due diligence 4% 5%
Legal/regulatory differences 4% 4%
Language barriers 2% 2%
Logistics 1% 8%
Tax 1% 2%
(percentages may not equal 100% due to rounding)
Sterling has experienced a significant level of volatility over the last 12 months, reaching both seven year highs against the Euro and five year lows against the US Dollar in the period. Some UK companies have benefited from this volatility, with 6% attributing an increase in the size of their business to it and 4% saying it has accelerated their growth plans.
Others have been less fortunate, however, with 8% of companies attributing the closure of an office, a reduction in the size of their business, staffing levels or the cancellation of growth plans to the effects of currency volatility.
Jan Vlietstra, chief executive officer for AFEX, said: “Access to international markets has never been easier for small and medium-sized businesses but clearly currency risk is a huge challenge. Over the last 12 months, we’ve seen a lot of currency volatility, in particular in the Euro-zone as a result of the Greek crisis. As the key market for the UK, businesses of all sizes need to be alert to the impact currency fluctuations can have on their profitability and take action to mitigate that risk and protect their bottom lines.”
Managing FX risk
Currently, two-thirds (66%) of the UK SMEs surveyed do not currently employ hedging tools, such as Forward Contracts or Options, to mitigate their currency risk. However, currency volatility and the influence of a number of global events over the past 12 months have led many companies to revisit their currency risk mitigation strategies.
Euro-zone issues have led 63% of UK firms to revaluate their approach to managing currency risk although US economic policy (29%), the ECB’s programme of quantitative easing (27%) the fall in the price of oil (13%) and last September’s referendum on independence in Scotland (12%) have also played a significant part.
With the vast majority (91%) expecting international markets to remain at least as volatile in 2015 as they were in 2014, it is unsurprising that a greater number are actively looking to actively manage their currency risk. Around half (52%) of companies plan to use Forward Contracts this year. These contracts allow firms to lock in a price for a currency exchange up to 12 months in advance, providing certainty and protecting a business’s bottom line.
Around a quarter (26%) of firms intend to pass on their currency risk to their suppliers or customers by demanding that payments are made in sterling and 8% plan to use natural hedging to manage their FX risk. Natural hedging involves matching the liabilities against the assets in foreign markets to limit exposure to international markets and avoid converting currencies as far as possible.
Stuart Holmes, EMEA general manager for AFEX, said: “Managing currency risk is often seen as something available only to the big multi-nationals that have dedicated finance functions and are doing huge amounts of trade overseas. The fact is that in a world that’s becoming increasingly globalised, more businesses than ever find themselves exposed to foreign currencies. There are services and tools that enable firms of all sizes to understand and manage their exposure so they can take full advantage of the opportunity international trade presents.”
Flybe, Europe’s largest regional airline, which has significant exposure to the US Dollar, uses AFEX to manage its short-term cash flow requirements.
Richard Cornish, cash manager, Flybe, said: “In a given month, we can have 4-5 million dollars of payments to make. We rely on third party advice to help smooth any short-term volatility between sterling and the US dollar and help remove an element of risk involved, which payments of that size can bring.”
Increasing international trade amidst volatile backdrop
Despite uncertainty about the macro-economic picture, UK companies are more bullish about their prospects when it comes to international trade this year than they were in 2014. Nearly half of respondents (46%) are expecting an increase in their international trade levels in 2015 – up from just 26% in 2014. Of those, the majority (61%) are looking to Western Europe to drive this growth. The United States (36%), China (14%) and Eastern Europe (13%) are also identified as key target markets.
Only 12% of UK companies intend to reduce the level of international trade this year.
Rachel Hollos, global marketing director, AFEX said: “The findings from this research ensure we understand the issues facing SMEs, allowing us to offer relevant products across our key target markets.”