As a small business owner, there are many factors that you must constantly be monitoring to ensure that you stay within your margins.
Especially now, in a time of rampant inflation, it’s clear that entrepreneurs are having to work double-time to ensure that the cost of doing business does not exceed what they can afford to pay.
Labour costs, supply chain troubles, unexpected repairs – these routine occurrences can put a serious dent in your bottom line.
One important factor that you may already know if you import or export your goods overseas is the exchange rate or the value of the British Pound against other currencies, such as the Euro and the US Dollar. So, will exchange rates impact your small business in 2022? Let’s take a closer look and find out.
Exporters beware
If you export goods, services, or supplies to a country outside of the UK, the exchange rate could have a significant impact on your bottom line. This is particularly the case if you charge your invoices in a foreign currency. Let’s say you are selling a product to a client in Germany and you invoice them in Euros, with the cost being €100 exactly.
Now let’s say that the exchange rate for GBP/EUR stood at 1.19 at the time of the invoice, meaning that the customer’s €100 would be worth around £84 by the time it landed in your account. However, let’s say that the value of GBP relative to the euro rose before they paid their invoice, with the new exchange rate standing at 1.22. In this case, the value of that €100 payment would have fallen to around £81.50, meaning less money in your account for the same invoice.
Import costs
One of the more obvious risks to businesses from changing exchange rates concerns imports. If you import vital parts and components from overseas, your monthly costs are directly affected by the GBP exchange rate with the currency of the country from which you are importing.
Let’s walk through this with another example. Let’s say that you ordered a shipment from China worth 300,000 CNY at an exchange rate of 8.6, meaning that the cost of the shipment in pounds would be £34,825. However, if in a month’s time the payment is due and the value of GBP relative to the Yuan has fallen to a lower rate of 7.8, then that same invoice will now cost you £38,461. This is how fluctuating exchange rates can have huge real-world impacts on SME owners.
Pay attention to the market
To stay ahead of changing exchange rates and to adopt your imports, exports, and invoicing accordingly, it helps to pay close attention to the foreign exchange market. This helpful guide on what is forex trading, designed to help investors who wish to make money off of currency market movements, puts it nicely. It explains that factors such as market sentiment, political stability, interest rates, and public debt announcements all have immediate and tangible impacts on exchange rates.
By keeping one eye on the markets, you might just be able to time your business activities in a way that doesn’t hurt your bottom line.
Business owners have plenty to pay attention to in the wider market in 2022, exchange rates included. You might have a lot on your plate, but keeping abreast of general market developments is essential for exporting and importing business in the UK this year.
