How Foreign Exchange Can Affect Your Business? And How You Can Adapt?
In the era of global trade, economies are now interlinked with — and depend on — others more than at any point in history. Up until the impact of the coronavirus pandemic, trading volumes were still trending upwards. There are many additional elements too, from the foreign exchange market to geo-political tensions. And each one has the potential to affect how you do business.
For small and medium-sized enterprises (SMEs), it might seem odd that events or decisions on the other side of the world can hit the bottom line at home. As a global trading hub, Singapore is particularly exposed with its trade-to-GDP ratio far in excess of 300%. And it makes it all the more important that businesses are ready to adapt to any forex or wider economic pressures.
A Barometer of International Trading Conditions
It doesn’t take much for SMEs and even larger corporations to be affected by activities abroad. Whether sourcing raw materials from or sending products to customers overseas, a business is going to encounter both risks and opportunities when more than one currency involves. And it can be guided by the value of one currency on the foreign exchange market against another.
For businesses that depend on even the smallest international element, this is important. Let’s say you import goods from the European Union (EU). Any change in the EUR to SGD rate could have a substantial difference on how much you actually pay. It could be the difference between paying SGD 1000 more or less for goods that remain the same price in EUR as they always are.
With that in mind, it could then be beneficial for your business to look elsewhere. Especially if the price of those goods in CNY or USD work out cheaper in SGD. The opposite also applies for those businesses that rely on exporting their products and in which currency they invoice their customers. In such cases, billing a customer in the local currency is perhaps the best option.
The Indirect Impact You Need to Consider
As the owner or decision-maker in a business, it’s not all about the direct impact of movement in the forex market. There are indirect, sometimes hidden factors to consider too. Fuel is a key example of this. The price of crude oil is listed in USD, so any fluctuation in the exchange rates between the Dollar and local currency can have a major impact on domestic fuel costs.
Forex affects the competitiveness of a nation or economy. If the home currency loses value on the global market, importing goods becomes more expensive. Yet, this can mean opportunities too — whether its in the shape of higher domestic demand or overseas tourists who’ll get more value from a currency with a lower value. The important thing is to be able to recognize this.
There are, of course, other things your business can do to mitigate how the forex market could impact your business. To protect against short-term volatility (especially in difficult times), one solution could be to employ fixed contracts. This means setting a fixed price for a set period of time — up to a year in some cases. And it can spare you the impact of dramatic rate changes.
One other solution could be easier in theory than in practice — and that’s to limit your exposure to other currencies. If a business only uses one or two currencies, the global forex market can’t present as many risks. But this can be difficult when, in an era of globalization, it’s not unusual to turn to companies, suppliers and customers in other countries to encourage growth.