Post Brexit currency fluctuation and how to hedge against it – do you have a plan for your business?

The Brexiteers didn’t have a plan, the former PM David Cameron didn’t have a plan – so it’s hardly any wonder that many SMEs don’t have a plan for a Brexit-vote landscape…

Well, we need one now and we need it fast. A lot of my clients who run SME’s are suffering the immediate impact of currency fluctuations and the pound falling through the floor against the dollar to levels not seen for 30 odd years. The bottom line is no one can plan effectively if you’re at the mercy of fluctuating markets and panicked bankers.

So here’s my advice in two steps. Step 1 is how to develop a currency strategy, Step 2 specifically looks at ways and means of minimising your exposure to currency fluctuations. In these uncertain times, these could easily mean the difference between profit and loss for internationally trading companies.

Step 1: Have a plan

1. Don’t panic! The Brexit process will take at least 2 years so get a short term plan in place as an interim measure to hedge against the currency risk and ensure you have enough cash flow and credit lines to see your business through these uncertain times.
2. Start talking to your suppliers and customers to reassure them of your position & dispel all the misinformation that’s around.
3. Consider your exposure to the currency risk by establishing what you are expecting to pay for, get paid for, in what currency and when.
4. Understand how exchange rate fluctuations will impact our incomings and outgoings.
5. Establish goals such as an ideal exchange rate that allows you to remain in line with your business’s budgetary projections – know your best, worst and expected projections so you can create your currency policy.

Step 2: Ways & Means of hedging against currency fluctuation

1. Internal hedging – if possible given the company cash flow, buy and sell in the same currency at the same time.
2. Forward hedging: sell a set amount of foreign currency at a pre-agreed exchange rate up to one year ahead but beware – the date is fixed so make sure your suppliers are reliable.
3. Price and sell your products in the foreign currency in exchange for cash in advance at the current market rate and transferred within a couple of days.
4. Agree an exchange rate with your suppliers for future orders.
5. Consider a bandwidth where contracts can be renegotiated if exchange rates move beyond an agreed area of tolerance (unlikely with EU countries but possible for softer currencies).
6. Insist payments are made in GBP.
7. Open a foreign currency account and rarely convert to GBP – ie match buying and selling in that country from that account, thereby minimizing exchange rate effects.
8. For big purchases, buy when the rate is favourable and hold the currency in a specialist foreign exchange business account.
9. Check transaction costs of exchanging funds from a local currency as they can be hefty.
10. Consider Currency Protection products – although beware as they can be expensive
11. Get advice from a foreign exchange specialist.

And finally… don’t forget to look for opportunities!

Take advantage of the drop in Sterling – use it as a positive for incentivising overseas buyers!

WrightCFO Ltd is a Financial Consultancy specialising in part-time Finance Directors for SMEs. Call or email me to discuss your business.

Highly Commended Best New Start-Up, Richmond Chamber of Commerce 2016

Tel: 07817 784 603
Twitter: @sophieLwright
Email: sophie@wrightcfo.co.uk
Website: http://www.wrightcfo.co.uk
Blog:http://www.wrightcfoblog.wordpress.com
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Cashflow Management

There are countless reasons why businesses fail, such as choosing the wrong business partner, not listening to your customers or avoiding having a business website. But if you choose only one thing to get right, make sure it’s your cash. 90% of small business failures are caused by poor cashflow, according to Dun & Bradstreet.

Here are my top 5 tips to being cash happy.

1. Create a cashflow forecast. 

A cashflow forecast is a planning tool which can be very simple to set up and maintain. I suggest creating a weekly one which spans up to 6 months. To create your cashflow, use a spreadsheet like excel, start with your current bank balance at the top. List all your outgoings for the week underneath it, and the income you expect to receive from clients. At the bottom, you should calculate what your expected cash balance should be by the end of the week. Teach someone in your organisation to keep this up to date and track it’s activity. You will be able to spot very quickly why things may be better or worse then you expected and you will know what you can afford to pay out. Set targets for your credit controller to ensure it is given enough attention and ownership.

2. Agreed terms & conditions.

Have very clear payment terms which have been agreed upon by both parties before any work has begun. A clause in your client contract could say “Invoice will be supplied to Client once work is complete and Client will pay Company 30 days from the date of the invoice”.. for example.   Agreement to these terms should be written or documented somewhere, in case anyone has sudden memory loss.

3. Invoice quickly.

The sooner you get the invoice out the door, the quicker you will be paid. Devise a system whereby the person raising invoices is told exactly when a project is complete so that she or he can send the invoice out that day.

4. Have clear credit control procedures.

These procedures should be documented and part of your credit controller’s task list.  Call your client’s accounts payable department before the invoice is due to ensure it has landed in the right hands and there are no problems with it.   I have seen invoice payments delayed by months because the addressee was wrong, or the wrong purchase order was used.   Ask for a payment date and make a record of all calls to clients. If payment is late call again. Send statements once a month.  Be a very polite and friendly pain in the neck.

5. Keep your friends close and your bank closer .

Keep your bank informed of how your business is doing. Devise a plan B with your bank manager. This could be having a line of credit in place, just in case things don’t go to plan. You want something to fall back on well before you actually need it.

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