How to budget your foreign exchange

Even the slightest currency movements can have an enormous impact on your bottom line, so it’s worth taking the time to get a plan in place to protect your business.

Over a 12-month period, the Australian dollar usually moves in a range of 15 US cents. Without currency protection in place, this volatility can impact profit margins by 20 per cent.

So what does this mean for import/export businesses?

While you can’t control everything, if you combine clear business goals with a currency risk management strategy, you are likely to be one step ahead.

Here’s how you can budget currency in the new financial year:

1. Set clear goals and stay close to your budget

At several stages throughout the year, it is important to forecast sales and purchases, consider the potential volatility impact and then set a currency budget level to determine profit margins and prices.

Ultimately, as a business owner you need to make sure that your budget aligns to the goals of the business – whether these are achieving market-share targets, launching new products, adapting to changing industry conditions, investing in improving quality or winning more contracts.

It’s also important to be aware of the exchange rate you have based your budget on. As a rule, budgets should never be set around currency market speculation, as guessing the direction of the markets can be a frustrating waste of time and energy.

Your budget needs to be planned, yet flexible enough to quickly recover from, or factor in, the fallout from major global events. Regularly checking and revising your budget throughout the year could save you a great deal in the long run.

2. Do your homework – but you don’t have to take it all on

The currency markets are full of risks and opportunities for importer and exporter SMEs, but managing these can be a full-time job – and a distraction for business owners.

It’s best to consult with a foreign exchange provider throughout the year, who understands your industry and can provide relevant currency market insights and analysis, as well as gauge what market shocks may be around the corner.

Getting an annual forecast from your provider isn’t enough though – a 'forecast' is just that, and you cannot afford to rely on it for a 12-month budget period.

For this to be worthwhile, you really need to have regular check-ins. The investment of time is worth it, as these conversations will drive important business management decisions and play a major part in your costs and profitability planning. 

3. Put a strategy in place

Whether you’re importing or exporting, there are a range of currency risk management strategies available to protect your bottom line and keep your budget on track.

The most appropriate strategy takes into account your level of activity, market exposure, risk appetite and budget flexibility.

A number of our SME clients have benefited from a review of processes and, where appropriate, a move away from shorter-dated strategies to a more long-term approach, aligned to business goals, that provides certainty and flexibility.

By putting steps in place to mitigate risk and capture opportunities, you can remain focused on what matters – the growth of your business.

David Greene is the head of dealing and resident economist at Associated Foreign Exchange (AFEX).

 

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