If you’re planning a holiday overseas, you’ll probably be aware of the impact that changing exchange rates could have on your spending money.
However, for many businesses, exchange rates are something that they have to consider every day. This is the case even for small entities who operate in local communities.
Here’s a look at the different ways that exchange rates can impact local businesses, even those that don’t trade overseas.
Why Does the Exchange Rate Matter?
It’s very clear that large companies that sell their products worldwide may be affected by the rise and fall of currencies, but they’re not the only ones.
Even small businesses that operate on a local level can be seriously impacted by fluctuations in currencies and variations in the exchange rate. In fact, the smaller the company, the higher their potential risk may be; without a substantial profit margin to provide a cushion, it may be even harder to deal with changes in currency value.
The primary routes a business can be impacted by the exchange rate includes:
- Selling goods overseas
- Importing parts or finished products to sell
- Indirect pressure due to exchange rate volatility
We’re going to examine each of these more closely in turn.
Selling goods overseas
When you sell your items overseas, it will inevitably be priced in the local currency. If your money has depreciated against the local currency, your goods will be cheaper for your customers to buy. It can help to increase your sales without your business having to cut its prices.
For example, if today, £10 is equivalent to $15, your customers will have to pay $15 for a knitted hat that you price at £10. But with the effect of the USD exchange rate, tomorrow £10 may be equivalent to $12.50. When you sell a knitted hat in the US, you’ll still receive £10, but your US customer will have only paid $12.50.
The reverse is also true. If the US dollar depreciates next week and £10 is worth $20, you might struggle to sell your items. This is because the same hat your customer could have bought last week for $12.50 will now cost them $20, despite the fact that the amount you receive hasn’t changed.
Importing goods from overseas
Even if a business doesn’t sell overseas, they may still be sensitive to the effect of the exchange rate if they purchase any components or finished products from another country.
It works in a similar way to selling goods overseas, except that this time the business is the customer.
Returning to the example of the knitted hats, let’s presume the business buys the wool in from Italy. 100g of wool costs €15, and today €15 is equivalent to £10. This means the company has to pay £10 to buy 100g of wool.
When they run out of wool and return to buy some more, the exchange rates have changed. Sterling has strengthened, and now €15 is worth £8. This means it will be cheaper for the business to buy wool, even though the supplier still receives the same price.
When the business runs out of wool again, they return once more to the Italian seller, but this time sterling has weakened. €15 is now equivalent to £20, so the business will have to pay £20 to buy the same amount of wool.
This example shows how volatile it can be when a business is relying on customers or sellers from overseas and how difficult it is to plan ahead.
Due to these difficulties, a business may decide to stick to domestic customers and suppliers only in an effort to avoid the exchange rate fluctuations. However, they may still be affected due to the overall impact currency values can have on the economy.
The exchange rate can directly impact the price of fuel, so deliveries around the UK may increase in cost. A depreciating currency may also mean that other domestic businesses import less, creating shortages and rising prices.
The impact of the exchange rate is all-pervasive and can’t be avoided by businesses, even if they only trade locally.