Basic Treasury for Small Businesses
When you’re getting a small business off the ground, one of the trickiest things is putting financial systems into place, especially when you’re trading in currencies other than £GBP.
So, what are the basics one should consider?
In a nutshell you want to consider if you will be selling or buying to international markets and will need to use different currencies. If so, how to manage that currency risk is well worth forward planning.
What’s happening in the world?
Finding international customers, partners or clients is one thing; but what about the logistics of foreign exchange?
As Shakespeare famously said, “All the world’s a stage”. And although he may not have been thinking about global businesses at the time, it definitely applies. The Worldwide Web and improved communication systems have made trade and business more global than ever before.
New markets are opening up every day – throughout Africa, Asia and South America, for example – and there’s opportunity all over the world. But Brexit and other factors highlights you always need to be aware of the possibilities of a change in the business environment that will impact on currency exchange rates and therefore your profit or loss.
Fluctuating currencies can affect your profits – unless you deal with the risk upfront.
One of the easiest and least messy ways of managing your foreign exchange income is to agree upon a fixed exchange rate with your customer, upfront, for an agreed-upon period of time and in writing.
Another simple way of managing currency risks is “non-hedging”, or issuing your prices in foreign currency from the outset, hence you will receive what you charge and will perhaps have to set-up foreign currency bank accounts. This is a really simple strategy, but won’t suit all businesses.
You can insist that your clients only pay you in GBP and leave the currency risk to them.
The risk of losing business because your company policy doesn’t suit the client or customer can be an unpleasant prospect, but establishing ground rules upfront can remove that risk and establish trust from the beginning of the relationship.
As well as thinking through how you may price your products and services to your international clients – you need to be thinking along the same strategies for when you need to make purchases from international suppliers. So if you regularly are purchasing in the UK from Europe (€euros) or the USA ($dollars) for example, you need to consider the effects of currency fluctuation on your cost base.
A really simple example – if you are regularly buying $2000 of suppliers on a monthly basis and the £/$ rate moves from $1.37 for ever £ to $1.25 for every £ then your cost base moves from £1,459.85 to ££1600.00 Imagine that you have a 12 month contract – you are committed to spending over 12 months £1,681.80 just because of the currency fluctuation on one contract.
It is worth considering hedging and getting expert advise.
Ask the experts
If you are unsure of what exactly to do when it comes to foreign exchange, consulting a foreign exchange expert is always a good bet.
Alternatively, if you don’t feel that you have the acumen to manage your foreign exchange needs, there are several companies who can hedge and manage your risk for you.
Currency is unpredictable
The general political climate, not only at home but across the world, create currency risks. And unpredictability is something that any business needs to mitigate in order to remain stable.
Staying in touch with global political activity and change is a very important part of it.
The Great Depression is a prime example of how worldwide economic events were affected by the downfall of a single major economy, and who would have predicted the global pandemic of 2020.
It’s your money
No matter how small your business is, formal finance-management systems can be a key factor in maintaining your momentum and maximizing your profits.
So – always consider your treasury options upfront. It may make a bigger difference than you think.