Most small business owners would attest that the day-to-day operations of their companies are a massive undertaking. A unique hurdle seems to pop up weekly, much like the whack-a-mole game we played as children. Just when you have the solution – Pop! You have to knock out yet another growth impediment.
Now imagine the complexities involved if your business relies on importing goods from overseas. We’ve all heard the cliché that our ‘world is shrinking’ due to the tandem of Internet connectivity and increasingly efficient global travel. Just 20 years ago, if you said you had visited China, people might have suspected you were a diplomat or a secret agent with a license to kill.
Now, people trek to Singapore on long weekends by cashing in frequent flyer miles. No big deal.
In fact, according to the 2011 UPS Perceptions of Global Trade Survey, almost a quarter of small businesses are engaging in global commerce. The survey also found that over 60 percent of those companies saw a positive return within two years time.
So what then to make of the daily headlines coming out of the Euro-zone, lately via Greece and Spain? The headlines are chock full of austerity plans and resulting civilian riots, runs on Spanish banks and the specter of Greece leaving the EUR for the drachma. The daily fluctuations of the euro (EUR) versus the dollar (USD) can drive a small business owner crazy - if you choose to let the headline noise affect you.
Of course, staying steadfast in the face of such daunting news isn’t easy. Emotions come into play and owners are often overwhelmed by the feeling that they ought to be trading currencies to increase profits, when in reality, speculative losses commonly result. Just as in the equities market, you’re better off in the long run sticking with a strategy than trying to outmaneuver a host of investors and traders who quite often have more time and greater technologies available to them than you do.
By employing strategies to make the frequent ups and downs of the global currency markets a non-event, you’ll be better positioned to protect your profit margins, leaving you to concentrate on what you do best – run your business. Here are three tips that you may find helpful.
Drop the casino mentality
Business owners who engage in a hedging strategy and lock in rates of exchange for future delivery often obsessively watch the markets. Buyer’s remorse sets in quickly. “I could have done so much better – I guess hedging is not for me.”
Hedge, lock the door, throw away the keys and don’t worry.
You know what you bought at, you know your profit margins and you effectively operate as if you were dealing in your home currency. “But the market moved in my favor!” On your next hedge it would have probably moved against you. Markets are cyclical and even out over the years. And who says you have to hedge your entire exposure? Depending on your risk appetite, play with percentages.
Take the long view
As mentioned above, the markets tend to even out over the years. The main goal of any hedging strategy is to create predictability. If you know the net cost of foreign-sourced goods, you can budget reliably and measure performance accordingly. It sure feels good to have a great quarter due to favorable exchange rates despite lousy sales numbers – but what if that scenario reverses over the next couple of months?
Business in Greece? Develop a contingency plan
The possibility of Greece leaving the Euro-zone is real. If you have Greek suppliers, discuss measures to alleviate that risk. Negotiate a switch to U.S. dollars in case of an exit. Nobody knows what a new drachma would be valued at, but at the very least, it would be a volatile currency to handle.
Guido Schulz is global head of strategic management at AFEX (Associated Foreign Exchange), a global payment solutions provider to small and mid-sized companies.
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