An Exporter’s Nightmare

With the world focused on the threat of a US recession, the jury still out regarding growth in Europe and the first rumblings of declining growth in China, exporters must be starting to evaluate the impact of a slowing global economy on their bottom line. Couple this with a highly volatile exchange rate and exporters have a recipe for potential disaster. But is it?

Most entrepreneurs are highly attuned to the impact of a downturn in their profit, managing the cash flow around which they have built their business very successfully. But there are other ancillary areas of an export business that can also contribute to the bottom line. One of the most commonly overlooked of these is currency hedging.

Up to 75% of mid sized businesses are leaving money on the table by not managing their currency risks effectively.

According to a recent Austrade-DHL annual survey only 25% of medium sized businesses undertake any sort of currency management. So, up to 75% of mid sized businesses are simply leaving money on the table by not managing their currency risks effectively. And it’s a sizeable amount at that, with additional annual returns of 3-5% commonplace, on a currency portfolio of $10,000,000, that’s an additional revenue amount of $300,000 – $500,000 each year. But what’s the catch?

To obtain this kind of return you need expertise. But most medium sized businesses are already stretched to the limit and don’t want to add significantly to their costs or their staff head count. What to do.

Most highly successful entrepreneurs seek outside professional assistance in areas beyond their expertise or limits of experience. The most obvious of these are lawyers for legal matters, patent attorneys for trade mark and patent advice, specialist accountants for tax planning, IR/HR professionals for labour force management and so on.

In the world of currency hedging most often exporters turn to their banks for guidance. Banks are primarily lenders and product providers. With the Swiss Loan affair still front and centre in most business owners’ memories, are they the best source of expert advice in currency hedging matters?

Expertise is said to result from 1,000 hours of practice according to a recent Harvard study. That’s not 1,000 hours of selling currency hedging product, although efficient execution is important, but 1,000 hours of evaluating exporter businesses, 1,000 hours of determining appropriate hedging systems, 1,000 hours of identifying and implementing strategy and 1,000 hours of product knowledge to ensure the product choices create an appropriate and successful currency risk management approach overall.

Over the last few years a growing number of highly successful entrepreneurs have discovered a relatively new professional service – an FX advisor who will work co-operatively with them.

Over the last few years a growing number of highly successful entrepreneurs have discovered this relatively new professional service – an FX advisor who will work co-operatively with the exporter and their bank to design an FX hedging regime to cater specifically for that SME’s export profile. For these super exporters, the slowing economic growth may result in a short term revenue decline. But they have hedged their profit stream, thus maximizing the return they get from every sale. For them, the currency markets will help them succeed and survive any global downturn.