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3 ways to manage foreign exchange risk for your business
Over eight out of ten SMEs and large enterprises in ASEAN and Greater China seek to expand across borders, according to UOB’s Business Outlook 2024 for SMEs and Large Enterprises. Business owners pursuing such a goal will need to pay closer attention to foreign currency fluctuations and how they impact expenses and revenue.
How foreign exchange (FX) rates impact your business
Fluctuating FX rates can significantly impact the day-to-day operational costs of businesses that rely on international supply chains, which include the prices of raw materials, machinery, and other inputs needed to produce goods or provide services.
Transacting internationally increases your exposure to currency risk—the possibility of financial loss when exchange rates fluctuate to your disadvantage. Say, for example, that you, a Singaporean SME owner, ordered products worth US$1,000 from a supplier. You paid a 50% downpayment at a time when the exchange rate was US$1 = S$1.30. That means you paid an equivalent of S$650. However, by the time you pay the balance of US$500, the exchange rate has gone up to US$1 = S$1.35. As a result, you pay S$675 for the balance, instead of S$650.
This creates a domino effect, as you will either have to accept lower profit margins once you sell the final product, or raise your selling price and risk losing customers.
Here are three ways to manage your FX risk effectively.
1. Navigate financial market trends
The first step towards effective foreign exchange management is understanding your business’s currency exposure. Firstly, you need to identify the currencies you trade in, the countries you operate in, and the extent to which currency fluctuations impact your revenue and costs. This awareness will enable you to make informed decisions and develop appropriate strategies to address potential risks, protect your investments and navigate the FX market more confidently.
The next step is to monitor conversion and financial market trends to determine whether or not it is an ideal time to act. Returning to the example above: if you see that the trend between the SGD versus the USD exchange rate is rising, you could proactively look for options in other markets, such as within ASEAN. In the event of a strengthening Euro, where you might have a large customer base, you could increase marketing efforts to sell more products in this region, thus increasing profitability.
2. Lock in rates with Currency Forward contracts
SMEs can adopt a strategic position to counteract potential fluctuation in exchange rates and protect from potential losses by purchasing a currency forward contract.
With UOB Business Banking, you can utilise two types of FX contracts – FX Spot, which converts your currency at an agreed-upon rate to use immediately within two business days; and FX Forward, which converts your currency at an agreed-upon rate for use within a contracted time frame.
An FX Forward contract enables you to exchange a specific amount of one currency for another at a future predetermined date and exchange rate. In the example above, you would “reserve” US dollars at the same exchange rate that existed when you paid the downpayment. You do this by entering a contract to buy US dollars at a given exchange rate on a future date. By availing yourself of a fixed rate, you would pay only S$650—not S$675—when the time comes to pay the balance.
3. Use technology to secure your desired FX rates
SMEs can consider using an FX trading app or online platform to help track FX fluctuations. The UOB SME App, for example, has a Watchlist feature that lets you choose currency pairs that you want to keep an eye on. You can set your desired range of exchange rates and get alerted through the app when a currency pair meets your desired criteria. You can then instantly book FX on the app when the currency rate is favourable to your business. In this way, you save valuable time and can book transactions directly in response to real-time exchange rates, minimising potential losses and protecting your profits.
Band World (Asia), a retailer of musical instruments, uses the UOB SME App to get such information and manage foreign currency risk. Mr Brando Tan, the company’s Director, says, “The UOB SME app helps me manage wholesale and supplier transactions from Europe and Japan, as well as retail distribution markets in ASEAN. I can now make trade finance transactions conveniently with submission and approval through this all-in-one app. Managing foreign currency risks is also key given the changing currency environment, and the app allows me to set up a personalised foreign currency watchlist plus receive alerts when my limits are reached. I can now secure the best foreign currency rates instantly without having to check the rates repeatedly. With a real-time view of business transactions, I can make strategic business decisions much more efficiently.”
UOB offers more than 30 currencies for trading with competitive exchange rates and low fees to effectively help you manage risks and meet your foreign exchange needs. Interested SME owners can easily start booking rates online via the UOB SME app, in person at any UOB branch or directly through your UOB Relationship Manager.
Download the UOB SME app to get real time information, data-driven insights and customised alerts, secure your preferred FX rates and manage your transactions and cash flow conveniently.
Do more on the UOB SME app
- Get personalised insights on cashflow trends
- Monitor live FX rates
- Create a watchlist of your favourite currencies
- Set currency pair alerts and get instant notifications
- Watch this video to learn how.
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