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Business is War

Business is war and for those who operate in the global marketplace, the battlefield topography keeps changing rapidly.  To succeed in this environment requires strategic vision, new and creative thinking and the ability to nimbly negotiate new challenges.

Less than a quarter of SMEs involved in exporting engage in any kind of currency hedging.

A key element that separates the successful globally focused entrepreneur from his less successful counterpart is the management of currency fluctuations.  In a recent Austrade-DHL survey published in July 2007, figures showed that less than a quarter of SMEs
involved in exporting engage in any kind of currency hedging.  This same survey suggests that 45% of exporters are also importers, creating the possibility of a natural currency offset. However variables such as timing, portfolio size as well as the targeted exchange rate can torpedo this defense.

Perhaps what this is really suggesting is that in the main, business is operating as it has always done in the past: reacting to changing circumstances as they occur.  This might win one battle, but without a comprehensive long term strategy the war can still be lost.  It is a tactical response that does little to support the success and profitability growth of any business enterprise, and can create enough chaos and panic behaviour to wipe out the profits in what would ordinarily be a highly successful venture.

In the past, it has been difficult for SMEs to exploit currency movements to benefit their business.  This is largely because of the prevalence of formulaic behaviour that is characteristic of the existing foreign exchange market.  But for those savvy entrepreneurs, there are ways and means as explained by Trevor Haines, Finance Director of Stellar Films Group, a manufacturer and exporter of film products to more than 23 countries, who regards their hedging practices as an integral element of Stellar’s profit strategy.  “As a growing business, the impact of a persistently high exchange rate was crippling our business profitability.  With this realization, we brought in some expertise, a specialist FX Advisory Company, Interfinanz and together we crafted and refined a detailed strategy that was supported by a simple but powerful hedging system.  As a result, we are able to take advantage of favourable exchange rate conditions and, while we would prefer an exchange rate of 50c, we are relatively untroubled with the Australian dollar at these levels.  With the profits we have achieved using these strategies and systems over the last 6 years we wouldn’t consider hedging any other way.”

“This type of approach is not the norm for most SMEs that undertake any type of hedging”, says Adrienne Sartori, Managing Director of Interfinanz, an organization specialising in the customisation of client specific strategies for foreign exchange hedging that support the key business objectives of growth and profitability.  “In the main, hedging has largely been an afterthought, with SMEs reacting often based on emotion, to wild fluctuations in currency rates.  By not considering hedging as a key contributor to profit growth, there have often been no strategies or systems put in place to support the underlying business’ profitability and growth objectives.  But with international expansion representing a substantial part of the growth plans of new companies, it is now more important than ever that a more strategic approach to hedging be considered.”

No disrespect to our banks and financiers, but we prefer to have an independent advisor who is on our side.

For both importers and exporters, the first port of call for hedging has traditionally been their bank where they are able to buy a collection of hedging products.  After the fallout from the Swiss Franc Loans, banks have been reticent to offer currency advice outside of providing economists’ directional predictions. For many SMEs, particularly those new to the hedging market, any type of system that has been created has often been as a result of using trial and error – generally with exchange rate losses along the way.  As John Smith, a Director of XYZ Corporation who has recently begun importing raw materials from Asia, says, “No disrespect to our banks and financiers, but we prefer to have an independent advisor who is on our side.  As a relative newcomer to the international marketplace, we have key targets to achieve and we want the best team of advisors around us to bolster our profit and growth outcomes. As we anticipate that foreign exchange activities will be an increasingly important part of our business we can’t really afford to lose money learning the ropes.”

Unlike so many other variables impacting small business, currency hedging is one of the few areas where SMEs can outmaneuver their listed counterparts. With the relatively recent introduction of an International Accounting Standard (IAS 39) addressing currency hedging, large listed corporations have found it increasingly difficult to effectively manage and mitigate their currency risks as evidenced by the spate of currency hedging losses and write-offs during each reporting season.  These regulations do not apply to SMEs.  As Adrienne Sartori points out, “SMEs have a truly unique opportunity to optimize their foreign exchange activities to suit their risk profile and their business practices.  One of the most under exploited advantages of the SME sector is their ability to nimbly respond to changing market conditions and they will always beat a rigid, old world approach.  With volatile exchange rate conditions continuing, currency hedging is a particularly fine example of how SMEs can use their position to best advantage and it requires little financial outlay for an often stunning bottom line impact.  Our team would generally anticipate a 2-5% return on any hedging portfolio we are managing.”

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