The falling pound and your business
Article Date: Sep 26 2008
Currency dilemmas
In the past six months the pound has fallen by more than eight per cent against the dollar and the euro, and declined two per cent against the yen. GrowthBusiness looks at the implications for UK businesses on both sides of the import-export fence.
‘The falling value of the pound to the dollar has proved very significant for us,’ says Paul Luen, managing director of Yorkshire-based Martek Marine, a manufacturer of environmental safety equipment for the shipping industry.
It’s allowed Martek to accelerate exports to Europe and beyond, notably the Far East. He explains: ‘It’s steered me toward pricing in the eurozone in euros where previously we were pricing in pounds, so we can keep the same price in the eyes of the customer but increase the margins. It’s working very strongly in our favour at the moment.’
On the import side, it’s a different story. Russell Lister, after-sales manager at Grimme UK, which specialises in technology and equipment for potato harvesters, says the rising euro and falling pound are squeezing the business: ‘We have had to increase the prices of machinery and spare parts.
‘That said, last year was good for us and this year will be good too. It hasn’t hit us properly yet.’
For Luen, the market conditions are ideal for expansion. He claims currency rates are leading to an additional ten per cent margin on actual sale price.
‘In some cases, it can be as much as a 40 per cent enhancement on the gross margin of the deal.’
If there is a downside, Luen says it’s that some goods need to be purchased in dollars. ‘There is a balancing effect,’ he admits.
‘The perfect scenario would be a total cancelling out between the dollar receipt with my dollar expenditure. That would remove any risk whatsoever, but that’s not the case.’
Lesley Batchelor, chair of the Institute of Export, strikes a pragmatic note regarding how businesses can benefit from the present currency valuations. ‘The pound falling is good as far as exports is concerned, but we’ve also got a heavy price on fuel which internationally is always charged in dollars, and rising food costs.
‘It’s just dire everywhere, so even if the pound isn’t quite so strong against the dollar, it does mean you have to rely on people in that marketplace being able to afford to buy your product anyway.’
Smart money
By Piers Cracknell, Moneycorp
These are volatile times in which we live. After a relatively stable period the exchange rate has become unpredictable, which can make it difficult for companies to do business overseas. Sterling has weakened significantly to a two and a half year low against the dollar and an all time low against the euro.
Exporters of goods and services have a relatively straightforward decision to make. They can either stick with current foreign currency price lists in the hope of generating more sterling income or adjust foreign currency prices downwards to build – or retain – turnover. Importers face a tougher task, particularly those dealing with goods for which demand is elastic. Consumers will buy imported coffee at almost any price but will not necessarily pay up for luxury cars when the whiff of recession is in the air and their jobs are on the line.
Firms on both sides of the divide have important business decisions to make. They can also take steps to minimise transaction exposures by anticipating flows and buying or selling the currency “forward”. It is important not to get carried away and cover every anticipated penny on the assumption that sterling is doomed. Yes, to do so would guarantee a known exchange rate for the future, but it would also create a new business risk: if the pound moved in the wrong direction it could cripple the business model’s pricing assumptions.
The trick is to hedge the exposure but to do it judiciously.
Piers Cracknell, commercial director at forex specialist Moneycorp, is happy to answer finance-related questions. Contact: Call 020 7823 7400 or email by clicking here.
