The UK economy is registering growth levels higher than before the financial crisis. This has been reflected in sterling performance, which, although fluctuating, has been strong on the whole.
However, sterling strength is not a boon for everyone. UK exporters, in particular, have suffered from currency costs which chip away at profits. Larger companies have reported significant losses due to currency swings – Rolls-Royce is projected to suffer from a £300m loss and Diageo £330m. These losses happen regardless of sales levels, meaning that a company can see significant growth in sales, but still have their profits eroded by currency costs.
But all is not lost for businesses engaged in exports. Carl Hasty, Director of international payments specialist Smart Currency Business, offers these top tips for UK exporters facing a strong sterling:
1. Don't give up
Companies that trade internationally are at the mercy of currency markets, regardless of their size. However, this does not mean that they should stop trading overseas. The benefits of exporting, in particular, are vital to business growth. New markets mean more potential customers, which means more potential profits.
2. Minimise Losses and Mitigate Risk on Currency Costs
Currencies are always at the risk of fluctuation. Even if sterling were to remain stable, the performances of other currencies would affect sterling strength. Businesses should look to hedging their currency purchases by strategizing in advance. Locking in an exchange rate at current levels will allow a business to know how much it will be spending on currency exchange, allowing it to budget for production, sales and profit more effectively.
3. Reconsider Your Pricing Strategy
Businesses that use a cost-plus pricing model – one that determines sale prices based on costs and a desired mark-up – should reconsider their strategy. As the cost element makes up a large proportion of the overall price, any currency fluctuations will mean higher costs than budgeted. This can chip into the desired mark-up, and can even result in losses.
Businesses that opt for value-based pricing can be relatively less susceptible to shocks from currency swings, as the cost element of the prices they set make up a smaller proportion of the overall price compared to cost-plus pricing.
Growing a business when currency costs appear to be unfavourable can be tricky and risky. However, businesses should judge for themselves if this guidance can help them anchor their profits given rapidly-changing currency markets. Currency fluctuations are often short-term, whereas plans for growth are long term, and the latter should not be abandoned because of the former unless figures suggest otherwise.