By Carlos Martins
Have you ever chased a moving target? No matter how dedicated you are, you will start to feel discouraged and worn out after a while. The same happens with small business owners when it comes to managing their foreign exchange. Many business owners are more focused on finding the best exchange rates rather than consistently managing their exposure. As a result they get worn out, and rightly so.
Let's look at the facts. The Rand appreciated from R16.35 to the US Dollar in late 2021 to R14.6150 in March 2022 [+10.6%], then fell to R18.20 six months later [-24.5%].
It retraced to just above R17.00 by January 2023 before falling out of bed to R19.9166 in May 2023 [-16.8% 6 months later].
The Triennial Central Bank Survey of foreign exchange and Over-the-counter (OTC) derivatives markets conducted by the Bank for International Settlements in 2022, found that daily trading volumes hit new record highs of $7.5 trillion, in the global foreign exchange market.
This is enough to leave any small business owner out of breath as these statistics highlight the high level of activity and volatility that they need to navigate in currency markets.
Chasing the best rates and ignoring the importance of managing currency risk can have severe consequences. Volatility in foreign exchange markets can disrupt cash flow, impact profitability, and ultimately jeopardise the survival of these businesses.
That's why small business owners need to shift their perspective from simply chasing the best rates to prioritising risk management. They should focus on the bigger picture and strategically manage their exposure to foreign exchange risk. By doing so, they can effectively protect their bottom line and navigate the challenges posed by currency fluctuations.
The key to managing these risks lie in establishing and implementing a comprehensive risk management strategy. A survey conducted by JP Morgan found that 80% of small businesses that implemented a risk management strategy reported a positive impact on their bottom line. Such a strategy helps business owners in identifying and understanding the specific risks that exist in the market, quantifying these risks, and aligning them with the business's risk appetite. It also requires setting up a process that allows for ongoing evaluation and adjustment to ensure that the strategy remains effective.
The complexity of financial markets and the fast-paced nature of currency fluctuations make it impractical for small business owners to handle risk management on their own. American Express found that 43% of small business owners indicated that they don’t actively manage the risk posed by foreign currency fluctuations due to perceptions of the complexities and time constraints involved in implementing such a strategy. This is where business owners can benefit from either employing someone with the necessary skills or enlisting the assistance of specialised advisors. These professionals can provide guidance and support, helping business owners develop and implement an effective risk management process.
Furthermore, it is important to recognise that currency fluctuations are not just influenced by local factors. Geopolitical events, economic changes, and developments in major economies all contribute to the volatility experienced within local markets. Faced with such complexity, it becomes even more critical for small businesses to seek expert guidance that takes into account the broader global context.
SMEs need to focus on running their operations, not trying to time global currency markets.
Take a breath, set a costing or budgeting goal to target, and implement a risk management plan to help you stay as close to that target as possible. This will not only free you up to focus on your core business, but will also enable you to navigate the challenges posed by currency fluctuations and ultimately ensure the success and sustainability of the businesses.
Carlos is a co-founder and director of Change Financial Solutions.
** The views expressed do not necessarily reflect the views of Independent Media or IOL.
BUSINESS REPORT