What small businesses ought to know about currency exchange rates

Currency values inevitably fluctuate. With that said, their movement can significantly impact many economical factors that come into play when businesses consider their next steps.

In the aftermath of the long-term lock down experienced, businesses that survived the economic downturn now face a revival period that can either keep them afloat or sink them.

Which outcome they will face depends on their game plan, which is largely dependent on manoeuvring the movement of exchange rates in their favour.

What about exchange rates?

It should be noted that there are two types of exchange rates – fixed and flexible. In The Balance’s trade policy guide , it is noted that most currencies fall into the latter category.

This is because fixed rates rely on the value of the local currency and the resource of the nation’s central bank.

The biggest currency players like the US dollar, British pound, and Japanese yen are flexible currencies. The Saudi Arabian riyal’s value changes when the government decides it should.

The world of exchange rates today

Though largely associated with foreign exchange traders because of their role in determining exchange rates, their role in the day-to-day operations of business is more significant than often paid mind to especially in the exchange of goods and trade internationally.

Whether you directly deal with moving goods across the borders or you merely accept international transactions, fluctuating exchange rates affect both your cost and profit.

That said, even businesses that are strictly local get affected by way of pricing and costs.

Proactive directions businesses should take

This goes hand in hand with any solid business plan, especially if you consider expansion down the line. There are a few pathways that any enterprise should actively pursue to levy the state of these rates into their favour:

Manage your assets accordingly

Exchange rates also affect interest. Taking this into account when managing your assets can help you allocate your budget more effectively and properly distribute your resources.

To figure out the most recent data on the relevant values to your business, you can make use of the currency calculator which you can find among its other financial calculators.

Do your research regularly

The best way to stay ahead of the game is to remain well-informed, especially concerning such financial aspects that are hardly ever static.

Other than looking at tools that provide real-time values, businesses can also look at the forex heat map on FXCM to monitor the volatile currency pairs that are currently happening.

Too much market movement means the value of those currencies aren’t stable, and for business owners, that could mean too much fluctuation in their expenses and pricing.

Volatility indirectly affects your competition, too, and determines the cost of imported goods. Add to that any overseas transactions you might have whether you’re buying or selling, and your bottom line is affected.

Protect your business against fluctuations

Thankfully, you don’t necessarily have to just sit back and accept the ebbs and flows that come with changing exchange rates. In terms of product inventory and consumable necessities for operations like fuel, consider buying in bulk.

You can even time your purchases at opportune moments when the exchange rate is in your favour. It’s cheaper than buying for short periods that are subject to unpredictable rates.

Contracts for long-term transactions and projects, also make use of fixed contracts so that returns on investment and payables remain the same regardless of rate changes.

Long-term impact and other considerations

While the economy thrives on the power of businesses, it also informs the outlook for businesses in the future. Looking at exchange rates are a reliable way of monitoring how stable one’s economic landscape is.

A nation’s financial capability, in terms of growth and balance, can be determined simply by checking its exchange rate and comparing it to the value of other countries.

The strength in its value stands as an immediate signal that can inform you whether the next year is one for confident expansion or conservative maintenance.

Volatility also affects your profitability in the long run, and can even hamper or bolster the Gross Domestic Product (GDP) of your country.

If costs affect demand and public sentiment, it can even trickle over into your human resources, pushing the need for restructuring and potential job displacement.

Future planning

Having this information in one’s arsenal can help any leader in crafting a future-proof business plan. Being aware of seemingly minute factors with real impact can be the difference between a good year and a bad one, especially after the pandemic.

Exchange rates are just one of many details you should always look at. Hot on the heels of the global rollout of competing vaccines, the World Economic Outlook is seeing a projected economic growth of 5.5% in 2021 despite general uncertainty in the new normal.

This could be an ample time to gather your knowledge and resources to maximise the potential of the coming years.