Australian manufacturers are being warned that unexpected changes in the foreign exchange market could significantly impact their bottom line.
Travelex Regional Divisional Director, Asia Pacific, Kerry Agiasotis, said following recent volatility in the value of the $AUD it was an opportune time for Australian manufacturers to consider the foreign exchange (FX) risk in their business.
To help firms better understand FX exposure and risk, Travelex has released a new resource, A Guide to Hedging — How Small and Medium Enterprises Can Protect Their Profit Margin.
The guide helps companies to develop an understanding of the impact FX fluctuations can have on their bottom line and what steps they can take to protect their profit margins.
“Many manufacturers fail to recognise how sophisticated their business is or has become and often have the view that FX hedging products are the domain of large corporations.
“Recent research by East & Partners shows that fewer than 1 in 20 small and medium enterprise are actively hedging currency risk, which is concerning given the volatility we have seen in the $AUD in the last 12 months.”
“Unfortunately, every company that conducts business internationally is likely to be exposed to movements in the value of the $AUD. With the $AUD fluctuating between 0.6007 and 0.8920 in the last 12 months, manufacturers need to understand the risk of this volatility to their business and take steps to protect their profit margins in the event of adverse moves in their domestic currency,” he said.
Mr Agiasotis uses an example of an Australian manufacturer that imports supplies to highlight the potential impact; “Let’s say that manufacturer has just placed their next order of consumables from overseas and the payment of USD$100,000 is due in three months. If today the USD rate was 0.8669, the payment would cost them AUD$115,353.”
“However when making payment in 3 months time, if the exchange rate has fallen to 0.7600 the cost to that business would be AUD$131,578, an additional cost of more than AUD$20,000. This additional cost will directly impact the company’s overall profit margin.”
“To mitigate this risk the company could have used a variety of FX hedging products, with the most common being a Forward Exchange Contract (FEC). This would have been placed at the same time they place their order, locking in an exchange rate and therefore protecting their profit margin,” Mr Agiasotis said.
The Travelex guide provides some simple steps that companies can use when considering how best to hedge foreign exchange risk in their business.
“Managing your FX risk doesn’t need to be complicated. As a market leader providing payment and FX solutions to SME’s, Travelex recognises companies are looking for solutions that are easy to understand and easy to implement.” he said.
“The first step is for businesses to understand their level of exposure if the $A moves adversely and determine a rate at which they can import or export goods and remain profitable. Ideally, they would do this as part of their business planning cycle, determining their foreign exchange related spend over their planning period.
“Once a business understands their budget rates and foreign currency forecasts, they are in a position to develop a plan that best suits their business. At Travelex, we help companies manage their foreign currency exposure and we do this already for a large number of SME’s across Australia and in a wide range of industries.” Mr Agiasotis said.
The Travelex Guide to Hedging is available by contacting Travelex Global Business Payments on 1800 730 400 or firstname.lastname@example.org.