Forex Fluctuations vs. E-commerce Businesses - What You Need To Know
E-commerce has made it possible to do business with anyone, and with a Global Economy at your fingertips comes a whole host of new opportunities for innovation, trade, and growth. But with new opportunities come new risks...
Effects of exchange rates on business
The effects of exchange rates on your business can impact how competitive you are, both domestically and abroad. If there is an appreciation on the currency, exports increase in price, thus reducing your competitiveness abroad. A depreciation in the currency will increase import costs which (if you rely on these imports) will reduce that critical profit margin or price competitiveness domestically.
Effects of exchange rate fluctuations
While international growth can offer new opportunities, it also comes with its own challenges. One such challenge is the risk of currency fluctuations that comes with sending and receiving international payments. Of course, you could avoid this risk by simply sticking to your own currency. However, since your customers will likely prefer to pay in their local currency, to do this would be to exchange the risk of currency fluctuations for another, potentially bigger risk – that of your customers taking their business elsewhere.
So, if you’re exporting your product or service and are receiving funds in a foreign currency, there is a chance you could lose out on money if the pound gets stronger. Similarly, if you’re importing and making payments in a foreign currency, you could see your costs increase if the pound gets weaker.
But just how significant a problem is the risk of currency fluctuation for SMEs?
Changes in foreign exchange rates are often tied to real-world events.
Economic risk:
Economic risk is caused by the effect of unexpected currency fluctuations on a company’s future cash flows and market value. Unforeseen exchange rate fluctuations can have a substantial effect on a company’s competitive position, even if its exposure is restricted to domestic markets.
As we are facing currently, macroeconomic statistics such as inflation have the greatest impact on forex markets. Stock, bond, commodity, and other capital markets also have a strong influence on exchange rates. International trade numbers, such as trade deficits and surpluses, play a vital role in forex markets.
The fiscal and monetary policies of any government are the most important factors in its economic decision-making. Central bank decisions that impact interest rates are keenly watched by the forex market for any changes in key rates or future outlooks.
As the world becomes ‘smaller’ and international trading becomes the norm for businesses of all sizes, it’s inevitable that to remain competitive you will have to confront foreign currency issues. It is wise to start planning for the risk to your business and to consider what policies you have in place to mitigate your exposure.
If you have any further questions, please don't hesitate to email me at roy.butcher@raffingers.co.uk or click here to get in touch.