How exchange rates impact small businesses

There are many challenges facing small businesses, even the very successful ones. One of the most significant is the fluctuation of currency exchange rates.

The rise and fall in the exchange rates for major currencies have been a particularly acute problem for businesses in recent months. The vote of the United Kingdom to leave the European Union and the election of Donald Trump as US President has led to a prolonged period of turmoil in the currency exchange markets with traders trying to assess the implications and predict where the markets will be heading next.

The period of instability is set to continue and the effects of fluctuating currency exchange rates on business finance can be dramatic. Financial turmoil is bad news for any company, even if they don’t deal with overseas suppliers or customers, but it is small businesses that often bear the brunt of global economic uncertainty and the associated rise and fall in currency values.

Exchange rates for most major currencies are not set by government but are allowed to fluctuate according to the deals made by currency traders. That can have major implications for companies who want to carry out overseas transactions. For example, if you need to transfer money from UK to Spanish banks or give a quote to a foreign customer, it is vital to take into account the current state of the currency markets and the prevailing exchange rate.

Companies that carry out significant levels of trade overseas are particularly vulnerable to currency and exchange rate fluctuations, which can also make predicting the revenue stream difficult. Any small business will rely on income predictions for the financial year ahead, but that figure could rise or fall significantly depending on changes in the exchange rate.

Global changes in the value of major currencies can also increase the difficulty of making new deals and overseas contracts, which are vital to the survival and growth of many small businesses. A rapidly fluctuating exchange rate can mean that an agreement that was profitable when it was agreed becomes a bad deal. As a result, to avoid being caught out by these shifting economic sands, many owners of small businesses take an ultra-cautious approach to making new deals and are reluctant to commit to specific figures, which can put them at a significant disadvantage in an ultra-competitive market.

Small businesses are also more vulnerable to periods of fluctuating currency values than large or medium-sized enterprises as they often lack the financial backing to ride out negative short-term changes or to take a loss when the exchange rates turn against them.

That is why it is essential small businesses don’t overlook exchange rates. They can help to reduce the negative effects of currency instability by keeping their lines of communication with suppliers open, monitoring currency changes regularly and drawing up plans to cope with financial instability.

By optimizing their business activities around exchange rates, small businesses can minimize the harm caused by fluctuating currency values in a turbulent global economy.

Dragan Sutevski

Posted by Dragan Sutevski

Dragan Sutevski is a founder and CEO of Sutevski Consulting, creating business excellence through innovative thinking. Get more from Dragan on Twitter. Contact Dragan