Since the Aussie Dollar’s peak against the US dollar in July 2011, the Aussie has lost more than 30% of its value and is now sitting at $US0.78. This sharp drop should be a warning call to businesses. The kind of currency volatility that we’re experiencing represents a major threat to your bottom line if costs suddenly spiral and you don’t have enough to pay overseas suppliers.
So how can you protect your business against this kind of risk? The good news is that there are tools and strategies available to mitigate risk.
- Plan for risk
Develop a clear picture of the potential threats you face by setting out a clear budget for the year, with scenarios based on different exchange rates. Don’t forget to factor in any economic risks, for example: currency movements could affect consumer spending, which may drop if prices rise.
- Remove FX risk where you can
First look at ways to remove or reduce your foreign exchange (FX) risk. One option to consider is aligning customer billing cycles with supplier payments.
- Consider hedging products
You can use hedging tools, such as forward exchange contracts and FX options, to help manage your exposure. If your bank doesn’t offer them, perhaps try a specialist provider. It’s also a good idea to take professional advice when developing a hedging strategy, especially for determining: what tools to use, and whether you should blend a number of different strategies.
- Foreign currency accounts
In some situations, it may make sense to have a foreign currency account – particularly for businesses who both pay and receive money in a foreign currency.
- Don’t gamble
Unless you are confident you can pay the maximum losses you may face, don’t gamble with your FX. We can’t predict the future, and even if all currency commentators seem to be in agreement about the direction, it’s important to remember they could be wrong!
Complete protection cannot be guaranteed, and hedging against a fall might mean you won’t benefit from a rise. But don’t bury your head in the sand either - indecision can be costly.
If you need help planning for risk or are seeking business advice, contact us today on 02 9299 7044.