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What currency swings mean for small firms

Jonathan Watson - Sketch Foreign Currency Direct -

Volatility in exchange rates in the wake of Brexit can affect all businesses, especially those engaged in international trade, says Jonathan Watson, chief analyst at

The result of the EU referendum has stirred up seemingly endless political and economic issues which have had a major impact on exchange rates. 

What Brexit actually means is still unclear and the answer might take many months, possibly years, to understand. Small firms make up the vast majority of UK businesses and, even if not directly impacted by exchange rate swings, there are many indirect consequences on businesses during periods of volatile exchange rates.

Large exchange rates swings are generally frustrating because it complicates business. While a big improvement in your favour can be good news, it will mean someone – your client or your customer – suffers on the other side. The US dollar is almost 15 per cent stronger against Sterling since the referendum which means any business getting paid in dollars is effectively getting a 15 per cent pay rise. 

However, the reality is not quite that simple, as the overseas clients paying in dollars could find their costs have increased by 15 per cent. Most businesses use exchange rate clauses in contracts which provide for requote if exchange rates change by a certain percentage between quote, order and delivery. Having to renegotiate is time-consuming for everyone involved and in this example the UK business could lose customers. UK firms buying goods from overseas will see their cost base rise, which squeezes margins and can put pressure on other areas of the business. 

A weak pound is, overall, a bad thing because it is often reflective of a weaker economy which will only put further pressure on small firms through low consumer and business confidence. It does present opportunities in that it makes inward investment in the UK much more attractive and opens up many opportunities for small firms, or their clients, to explore new markets overseas as the cost of selling overseas tumbles. The short-term implications of Sterling weakness on Brexit have seen some big business deals going through, in part due to a weaker pound making the deal more attractive. These include the recent acquisition of ARM Holdings, the Cambridge-based semiconductor manufacturer. 

Many of the big banks have been quick to confirm they will not leave the UK but among the good news there is generally a lack of confidence as businesses withhold important decisions on investment, expenditure and employment. These short-term factors should subside as we start to understand better what lies ahead but any damage to the economy could take years to rectify. It was only last year the pound really staged a recovery, some six years after the ‘end’ of the financial crisis of 2008-9.

The pound is effectively a barometer of confidence in the UK, so future Sterling strength will be determined by the type of deal the UK gets, actions by the Bank of England and how the UK economy is performing. With the Bank of England likely to cut interest rates in August and possibly look at quantitative easing before Christmas, Sterling could fall further. In the longer term, as we understand better the implications of Brexit, the pound should rise but it is likely to fall further before it starts to get better.

Small firms should be prepared for further falls in the value of Sterling and look at contingency planning for their business in the event of further falls, but also rises. Even if your business doesn’t have direct exposure to exchange rates, in the global world of business it is important to understand their impact and the potential pitfalls on your business from them.

To mitigate further losses, businesses that are directly impacted by exchange rates could look to secure current rates by implementing a forward contract. These work by locking in current exchange rates so, if rates move against you, you are protected from further losses for up to two years. 

If your business relies on imports, planning 12-24 months ahead could help limit the implications of a weaker pound by buying your foreign currency in bulk. If your business is paid in a foreign currency you might wish to lock in the current favourable levels to secure those profit margins should events take an unexpected turn and sterling rises. The prospect of whether the pound rises or falls is almost irrelevant; the important thing is you will have certainty from an uncertain situation. Gambling on exchange rate improvements is a very risky strategy for any business and can easily end in disaster.

Jonathan Watson is chief analyst at