Many smaller companies need to manage exchange rate risk – expert
Top tips from PWC’s Roger Kerr
Look at how much of your profit is exposed to foreign exchange risk.
Could you cope with a 10 per cent move against you?
Consider whether you can buy some inputs in another currency such as US dollars to limit your exposure.
If the bank won’t give you enough credit for a forward contract consider using a foreign exchange broker or the Export Credit Office.
Be happy if you can fix your exchange rate at the level at which you did your feasibility study.
Do not think ‘‘I can ride this out and I’ll do great when the rate goes the other way’’. OTHERWISE successful small businesses are being ‘‘gazumped’’ on their profit margins by thinking they can beat the exchange rate, says PWC partner Roger Kerr.
Kerr, an expert in business foreign exchange risk, says a recent survey by PWC revealed a surprising number of businesses had no foreign exchange policy despite the exchange rate being a major factor in their profits.
With the Kiwi dollar hovering around record highs against the Australian currency, exporters to Australia who had not managed their currency risk would be losing money, Kerr said.
‘‘People think it’s about picking where the dollar is going to go but it’s not. No-one knows. It’s about your company, your competitors and your pricing ability.’’
New Zealand’s small population limits how much a business can grow domestically but according to the Ministry of Business, Innovation and Employment more than 75 per cent of all firms have never generated overseas income.
Many cite unfamiliarity and a lack of experience as reasons for not spreading overseas, where New Zealand firms are often forced to deal in other currencies.
Kerr said small businesses dealing in other currencies should not be afraid of tackling the risk.
The important thing was to come up with a hedging policy if there was any serious risk to profits.
‘‘People hedge on kneejerk reactions but the way to manage foreign exchange risk is to be highly disciplined and stick to a policy and make lots of small decisions throughout the year, not just one or two big calls.
‘‘The kiwi moves 10 cents to 12c every year, [so think] ‘What does that mean for my business and can I change my price’.’’
‘‘There are massive capital flows into our dollar every day that have nothing to do with import and export trade. It’s a volatile, highly traded and speculative currency.’’
‘‘Think, ‘If I get a 5 per cent movement against me or a 10 per cent movement how much does that affect my cashflow?’ Then decide how much to hedge and how far forward.’’
Kerr said small companies frequently had banks refusing to give them credit to obtain a forward foreign exchange contract, which would let them fix exchange rates for 12 or 18 months. SMEs could consider using a foreign exchange broker or get help from the Export Credit Office, a Government office within Treasury that provides financial guarantees for exporters that can allow banks to let them hedge their currency risks for longer.
Kerr said there were other ways to manage exchange rate risk, for example buying inputs in foreign currency, even if you were buying them companies.
For importers deciding whether they needed to hedge, the rule of thumb was simply to copy competitors, Kerr said. That way if one competitor had to raise prices, everyone else would too.
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‘‘If you’re in a competitive area of retail, ask yourself if you can adjust your sale price if the exchange rate goes against you. If the answer is ‘yes,’ you don’t need to hedge because you pass [the risk] on to the consumer.’’
For exporters the risk could be more complex. ‘‘They may be selling something in US dollars to a company in Asia who is importing the same product in euros from Europe. That requires a more disciplined approach and therefore exporters tend to hedge for longer.’’
For exporters the question was the potential impact on profits versus the cost of tying up credit by fixing foreign exchange rates.
‘‘It’s really sad when you read about a company who did all the right things with their product and marketing and then got gazumped by the exchange rate. It doesn’t have to be that way.’’