The currency markets are something you may not think have much of an impact on you unless you are a forex trader or have financial concerns in more than one country (for instance, you want to buy property abroad). However, the rise and fall of exchange rates between currencies can actually have a lot of effects on a business, and this can occur in ways you may not have thought about. We are currently living in times of quite significant volatility on the currency markets, and if you are thinking of starting up a company, then you need to understand where currency fluctuations can affect you more than ever.
Currency Affects Profits When You Sell Globally
Thanks to things like ecommerce, it is very easy for a start-up to encourage global business. Whether you are selling directly to customers or providing services to other businesses, unless you are the type of business that can only operate locally and in person, chances are you will want to make the most of the opportunity to make your products or services available to the widest market possible – and this means accepting payments in other currencies. This can be an area where price fluctuations can really hit you.
If you are a UK company with clients or customers in the USA, then when they pay you, you’ll want the dollar to be strong against the pound so that what they pay you will have more buying power after you have converted it. You can actually see the effects of this on the stock market – the FTSE 100, which has a lot of dollar earning companies on it, rises when the pound drops. This means that if you trade mostly with people in other countries, you actually want your home currency to be weak against theirs. It seems counterintuitive, but that is why it is important to understand it.
Currency Affects Costs
Of course, most businesses don’t just sell, they have suppliers. If you have a supply chain that involves any kind of imports (even if they are in the raw materials your suppliers or your suppliers’ suppliers use to make the things you use), then currency fluctuations (as well as commodity prices) can affect your costs.
Take the example of a car manufacturing plant. They assemble the cars in the UK, but the engines are made in another country and they pay for them in a different currency. When the pound is weak, the engines cost them more because pounds will buy less of that currency, and this pushes up their running costs. If your supply chain is an area where your business is sensitive to currency fluctuations, then you are best off in a situation where your home currency is strong.
What Can You Do?
Of course, knowing all this only really tells you which currency market conditions are best for your business, and not how to manage the fact that they won’t always be in the best state for you. What you need to do is consider how does forex trading work? How can you protect yourself from risk when your home currency is swinging in a direction that affects you negatively? The answers will depend on the type of business you have, but actually trading in the currency markets could be a way to protect your capital, and you should also look at where you can mitigate risk through your global pricing models.
There are lots of things you need to consider when you launch a business, but make sure you analyse how currency fluctuations could affect your own costs and profits and strategise to help yourself manage this.