Growing numbers of businesses are going to have to deal with the issue of delayed hedging according to recent reports. Businesses with risky currency exposure are being told to make a move and adopt a corporate fx strategy, or face being the next Sports Direct, who reportedly suffered a sixty percent profit drop as a direct response of a volatile currency market and the weaker pound of late.
It’s been said that businesses are realising the threat far too late and responding with hedging too slowly. This poor foreign exchange management is causing them to see some fairly staggering losses. It all comes down to mediocre forward planning, especially in light of the pounds recent behaviour.
In one particularly bad example, Sports Direct saw their pre-tax profit topple down to just £113.7m from £275.2m. That’s a staggering loss of well over £100m and is entirely due to fall in value of the pound and their lack of forward planning.
The goods the company imports for sale here in the UK have essentially risen heavily in price, brutally cutting into the company’s profit margins. A general lack of foresight in light of the falling value of the pound and their woefully insubstantial hedging strategy is what led to this circumstance, and you can guarantee it will keep happening to other businesses till notice is taken and strategies are put in place.
Do Not Underestimate Brexit
Businesses need to start taking Brexit and the currency shift into long-term consideration. For the next few months and years at the very least, Brexit is going to have some potent effects on the trading value and range of the pound. The effects of these shifts and changes are going to produce a wide range of potentially deeply costly economic, social and political circumstances for businesses, should they fail to plan long-term for them.
The UK Election Was Damaging Too
The one example everyone points to when it comes to recent downturns in the UK is Brexit, but let’s not forget the recent general election. The embarrassing snap-election called by Theresa May in a bid to cement power backfired powerfully as Labour made huge gains, and she was shown to be flailing and flapping in the media. None of which instils deep confidence in sterling.
Her sudden manoeuvre to couple up with the Irish DUP over a £1bln deal had yet another negative impact on the value and standing of the pound once again.
Despite all that the pound has continued to recover, and now stands in better stead against the dollar and Euro than it did a couple months ago. All this has provided some fairly lucrative opportunities for those invested in and carrying the right currency to make a lot of money. The value of the pound continues to rise in light of this.
Recently the Bank of England posted some more promising figures regarding inflation, have re-evaluated their previous 2.9 percent figure, and upgraded it to 2.6 percent, which has caused the value of sterling to plummet swiftly.
That 0.2 percent inflation swing could therefore carry a huge impact for many companies’ books, suddenly costing them a big chunk of potential profit.
Throughout all these vast and meaningful economic and political shifts in the UK, we’ve seen the pound experience some changes in value, as well as some consistent recovery.
From the shock Brexit results direct knock on sterling value, to the sudden loss of confidence many people felt at Theresa May’s less than ideal performance in her own political gambit, the snap general election, to her newest U-turn, the plan to team up with the extreme Irish DUP, at a cost to the UK taxpayer of £1bln. It’s all very negative as far as the value of the pound is concerned.
If your business is exposed to currency shifts, regardless of whether that’s importing or exporting products and materials, you need to be forward planning and making sure you’re fully protected against the currency risks. You can face some pretty crushing losses, like the £100m plus in Sports Direct’s case, and you need to take that risk into some fairly hefty consideration.
While the deceptively tiny shift of one or two percent might not seem much to the untrained eye, for a business moving millions around, it can be a disastrous loss of capital. Taking forward exchange into consideration, and creating a sturdy overall plan is, in many ways, the best way to be sure that your business is safe from a tumultuous and shifting currency value.