Why Most SMEs Don’t Actually Have an FX Strategy

Most businesses we speak to don’t have an FX strategy.

They have an FX process.

An invoice comes in. Someone in finance logs into the bank or calls their FX provider. They check the rate, buy the currency and pay the supplier.

Job done.

Except that’s not really managing FX risk.

If you’re spending £1m, £2m or £5m a year buying euros, dollars or another currency, movements in the exchange rate can have a serious impact on your margins.

And the strange thing is, plenty of businesses know exactly what they’re spending on salaries, rent, finance, raw materials and pretty much every other major cost.

But ask them what a 5% move in GBP/EUR would do to their annual cost base and quite often nobody has actually worked it out.

That’s where we’d start.

Stop trying to predict the market

One thing we’re constantly trying to get clients away from is the idea that FX management is about predicting where the pound is going.

It isn’t.

Nobody knows exactly where GBP/EUR will be in three months’ time. Neither does your bank. Neither does your broker.

We can have a view. We can look at the data. We can understand what’s driving the market.

But building your entire strategy around a prediction isn’t risk management.

It’s speculation.

The better question is:

If the market moves against us, what does that actually do to our business?

Let’s say you know you’re going to buy around €2m over the next 12 months.

Map it out.

When will you need it?

How certain are those requirements?

What’s your budget rate?

What happens to your margin if sterling drops 3%?

What about 5%?

At what point does it become uncomfortable?

Once we know those answers, we can actually start talking about strategy.

You don’t necessarily need to hedge everything

Another misconception is that having an FX strategy means locking everything in.

It doesn’t.

In fact, blindly hedging 100% can create another problem if your forecast changes.

There might be a good argument for protecting more of the currency you’re confident you’ll need over the next three months, slightly less further out and leaving some exposure open.

Every business is different.

That’s the point.

Your FX strategy should be built around your business, not whatever product somebody wants to sell you that month.

I look at FX more like insurance

My background before FX was in insurance, and I’ve always looked at the two in quite a similar way.

You don’t insure your building because you think it’s going to burn down on Thursday.

You insure it because you’ve identified a risk that you’re not prepared to carry completely yourself.

FX should be approached in much the same way.

If currency movements can materially affect your margins, you need to decide how much of that risk you’re comfortable carrying.

The objective isn’t to beat the market.

It’s to protect the business.

That’s a very different mindset.

At Orbis, that’s why we increasingly start relationships with an exposure mapping session rather than simply asking:

“Do you need to buy any currency today?”

Because before we talk about the trade, we want to understand the reason the trade exists.