With the New Zealand summer officially here, now is the time for small-to-medium businesses to prepare for what is notoriously an unstable time for business cashflow.
The series of public holidays over December, January and February can bring delays in payments and the movement of goods. SMEs that are in the business of trading goods internationally should be extra prepared as we look ahead to 2021.
The post-Christmas crunch is usually a tricky time to plan for, particularly as we see abrupt and significant movements in the currency market as liquidity dries up over summer.
Following an unprecedented year, the unpredictability the early New Year will amplify the challenges businesses already face. However, there are many ways businesses can look ahead and mitigate the risks.
“By failing to prepare, you are preparing to fail”
As companies transition to the ‘new normal’ and re-jig plans for 2021, the risks to cashflow due to currency fluctuations remain acute. Starting the year with a solid plan in place is a good foundation to help mitigate risk. While businesses navigate through uncertain times, it is a smart idea to look at the cashflow patterns from previous summers, as a guide for budgeting and forecasting.
There are significant peaks and troughs in the financial market over Christmas and New Year which can be troublesome for business operators who are on holiday. However, there are tools, like those we use at Western Union Business Solutions, that can ensure market orders automatically take place as soon as a specified rate becomes available.
Being prepared for every possible scenario during this period and having an FX provider in place to assist can ensure that businesses reap the rewards of the highs – and soften the lows.
Start with budget forecasting
Budget forecasting is never an easy task, and paired with the uncertainty of a global pandemic, it can feel impossible. However, the right amount of foreign currency set aside can be the difference between making a profit or a loss.
Exchange rates have a vast and often overlooked impact on the profitability of international trade in goods and services. As the 2020 US presidential election fallout continues and Brexit trade negotiations conclude exchange rate volatility should be top of mind for SMEs.
Firstly, SMEs should consult with their FX provider when looking at how they price their goods and services in relation to foreign currency costs. If the price is too high, then it will make the cost of the product unaffordable. If the price is too low, businesses could sell too cheap and lose money.
Once this is done, businesses can develop a budget for how much foreign currency they need to set aside.
Get a good rate
Exchange rates can be volatile – that’s why it’s crucial for businesses to set an indicative budget that allows a reasonable buffer. Budgets form the basis of a plan and the next step will be to consider FX solutions that mix the right proportion of tools, such as hedging and spot buying.
There is a strong chance that we may see a tight loan environment in 2021, so having the right balance here is even more important.
Working with an FX provider, businesses should be looking at how the market may shift over the summer months. Planning for various scenarios on exchange rate movements will again put SMEs in good stead to make it through the traditionally tough period.
Consider all your options
While businesses may traditionally look to bank facilities for any credit requirements, it is sensible to consider the role a non-bank FX provider could play in offering an unsecured credit line. For example, this could be done through FX hedging and tends to not adversely impact on borrowing ability.
It is more important than ever that companies, especially SMEs, find partners to provide specialist insights into how current events are reshaping the foreign exchange payments and help them prepare.
Article by Matt Spehr (pictured), a foreign exchange expert at Western Union Business Solutions.