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Manage the risks and opportunities in currency movements

Currency fluctuations affect us all, one way or another. A friend of mine benefitted when he bought a house in Spain a year or two back. What cost him £50,000 then would cost him £60,000 today, assuming the Euro price remained the same. With the movement of the pound against the dollar, my visits to the USA get more expensive year by year. On the other hand, some sales people are highly delighted because they managed to pull off fixed price long-term deals in dollars or Euros three or four years ago and they’re currently getting far more pounds than they did at the beginning.

This is the thing about currency movements, they can benefit you or harm you and many companies just don’t take enough notice until it’s too late. This is especially true for companies that are highly dependent on imported goods and don’t raise their prices (or shrink their product size) in time. It doesn’t take much to evaporate already slim margins.

But this isn’t all. Any company worth its salt isn’t only looking at the direct threats and opportunities arising from currency movements, they also need to consider the effect on their own suppliers and clients. They are equally exposed to the threats and opportunities inherent in currency fluctuations. If you don’t understand their businesses, at least at the level of whether they’re primarily importing or exporting and whether they tend to handle both in the same currency, or in different currencies, then you could find yourself surprised by their future behaviour.

It may sound daft but a lot of Indian restaurants and takeaways have folded in recent years because their pricing failed to track their growing costs, most notably the cost of foodstuffs bought from overseas. Even though, for example, the price of rice has stabilised, following a steep rise, it is still more expensive than it used to be because of currency movements. Yes, other factors influence their demise – the minimum wage they have to pay to non-EU immigrant staff, for example. Our favourite local takeaway is thriving but, in order to do so, it has raised its prices. A £25 meal a few months ago is now £32, which suggests it has not only adapted to its new costs but it has built in contingency for future changes.

Large businesses with a fleet of accounting staff are probably on top of this sort of thing, Watching prices and currency movements, imagining the effect and likelihood of future scenarios. But not all businesses have that luxury. Some SMEs, for example, might have a bookkeeper who pops in for two or three days a week to take care of things. They’re less likely to be involved in budgeting and setting prices. And the bosses and sales folk might be stretched out doing their own thing. Yet someone has to do the sums and make the decisions.

Ideally, it should be a team effort. A CEO ought to have their finger on the pulse but how much better would it be if finance and sales were involved too. If sales people were more aware of the real costs of a deal, rather than just their commission, wouldn’t this help the company thrive? After all, it wouldn’t take many poor deals to threaten the company’s very existence. And then where would they be? Waiting for commission that will never materialise, presumably.

Having sorted out internal awareness of the costs and opportunities that lie in wait, it’s time to turn attention to that other lurking problem. Which of your clients and suppliers will thrive and which will be threatened by future currency movements? You might have a reasonable idea from the intelligence that comes in from the field and from doing your own due diligence before signing contracts. But what about after that? Do you track their performance? Do you watch how well they surmount the obstacles the market throws at them? It’s all too easy to remain complacent and assume things won’t change. They might not but it would pay you to monitor your key business partners at the very least.

If this all sounds like hard work, you can always find third party business intelligence organisations that will be more than happy to track and report on your client and supplier lists. The end result could be that you manage to sidestep the many elephant traps that turbulent political and financial systems lay in front of you.

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