In the first few weeks of 2010 we saw some rapid movements in exchange rates. One moment the euro is flavour of the month and then it is losing ground against sterling and the US$. Just to show how extreme this movement can be, the euro has lost over six per cent against the US dollar since just before Christmas. So importing items or services priced in US dollars could be costing you 6 per cent more. Ouch.

But how could you have avoided this? The answer is simple by having a currency strategy.

So what is a currency strategy? In its most simple terms, it is having a plan of action for your purchase or sale of foreign currency. I have one client, based in the UK, who is selling in Europe and prices his goods in euros. They work to tight margins and have based their prices on an exchange rate of EUR1.125/£1. Therefore, if they aim to forecast their sales over the next three to six months and if the exchange rate is in their favour they will “sell” part or all of those forecast receipt of euros by using a “forward contract”. This is where they agree to sell to us and we agree to buy from them a certain amount of euros by a specified date. Sounds complicated, but is very straightforward and takes away all the risk of rates going against you [that is, you getting less or paying more than you expected].

I think it is also worth quantifying what a difference this could make to your bottom line. In the case mentioned above, the client was selling us approximately EUR1m each month. So a one per cent movement in the sterling/euro exchange rate would have equated to over the course of a year an amount of approximately EUR120,000 or £106,500. In fact, the amount of their “additional profit” compared to budget is over £250,000 to date.

But this solution is not just for companies exchanging EUR1m per month. If you were exchanging EUR100,000 a year, wouldn’t it be great to make an additional profit of EUR2,500 per annum and at the same time take away all the stress of exchange rates moving against you? This is the risk management part of the process.

So what is risk management?

Last year, the euro/sterling exchange rate moved between EUR1.02/£1 to EUR1.185/£1 and the US dollar and sterling moved between US£1.39/£1 and US£1.70/£1. So, over the course of a year, you could have “lost” up to 16 per cent if exchanging euros with sterling and up to 22 per cent if exchanging US dollars with sterling.

Again, this is worth quantifying. If you were based in the UK and having to purchase EUR200,000 worth of goods, then the difference in sterling terms in the course of a year would be approximately £27,000. That’s right a difference of £27,000. If you had bought all those goods at EUR1.02/£1 then you would have paid £196,078 and at EUR1.185/£1 you would have paid £168,776. A difference of £27,302.

Can you pass these cost increases onto your customer? Probably not. Is that the difference of your company making a profit or a loss? If a significant proportion of your costs are denominated in foreign currency, then it could well be. Is that the difference between being in business or not? Hopefully not.

Do you have to spend hours on your currency strategy and risk management?

No. Initially you will need to give it some thought and make sure you understand how it relates to your business. And, I would always say it is best to do this with an expert [now there is a surprise!] but, unlike dealing with your accountant or lawyer, this can be done for free. But once you have done a bit of homework and made sure you have understood the variables fully, then on-going, it is a case of just making sure that on a regular basis [and again I would suggest in conjunction with an expert], that you review your currency strategy and risk management. It won’t take you long and as the figures above show, could be hugely beneficial.

So, as far as New Year resolutions go, I think reviewing your currency strategy and risk management is a fairly painless one. You don’t have to forego eating or joining a gym, or spending long hours improving yourself. In fact, you should be able to afford to eat more and instead of worrying about gaining a few “pounds”, you would actually look forward to it. And as I noted, it doesn’t take a long time to do a comprehensive review of you work with an expert.

So please give me a ring. We focus on a personal service and we know we can add value.



Mr Purdy is a director at Smart Currency Exchange, www.SmartCurrencyExchange.com