- Many SMEs want to expand internationally or trade across borders but lack the knowledge and confidence.
- Implementing a simple foreign currency plan will reduce risks in a volatile currency market.
- Understanding the local market and partnering with a foreign exchange expert should also be part of your currency risk management plan.
Small and medium enterprises (SMEs) are no strangers to business risks and market volatility. In fact, starting a small business always involves embracing risks in order to succeed.
Every business must have simple risk management strategies in place to avoid getting caught or stuck. This is especially true of businesses that import or export products, given the natural exposure that comes with operating in overseas markets and dealing with volatile foreign currencies.
Despite these challenges, Australian SMEs are not deterred. The OFX Cross-Border Confidence Index found that 1 in 3 Australian SMEs (28.6%) currently engage in cross-border trade and are having great success doing so, with half (49%) saying the biggest benefit is increased revenue, followed closely by 37% seeing growth in their customer base. Moreover, 69.2% of SMEs that are not currently trading across borders say they are considering it, presenting an exciting opportunity for the Australian economy.
Many Australian businesses recognise the value in international expansion but many lack the confidence to realise it. Our recent report uncovered there is an $84 billion revenue opportunity on the table for SMEs by looking at cross-border opportunities.
Having the confidence and conviction to embrace risk in the pursuit of greater reward is more vital than ever if you want to grow your business.
Cross-border trade and the growth potential
Cross-border trade, or the two-way trade of goods, services or currencies across different countries, plays a key role in driving the Australian economy. According to ‘Australia’s International Business Survey 2019’, Australian exports totalled $469.9 billion in 2018–19, growing 16.5% in the past 12 months.
In 2017, Austrade reported that import/export businesses contributed 42% of Australia’s nominal GDP, up from 32% in the 90s. In the same year, exports alone surged 15% year-on-year to $387 billion, while imports grew 7% year-on-year to $377 billion.
However, with the global political and economic landscape littered with unprecedented volatility, Australian SMEs are understandably somewhat concerned when considering international trade. 4 in 10 SMEs (39.9%) feel a distinct lack of confidence in the Australian economy over the next 6 months, and an even greater number of SMEs (43.9%) report a lack of confidence in the state of the global economy over the same period.
With plenty of domestic and global unknowns, it is unsurprising that more than 1 in 5 SMEs want the support of an Australian-owned currency expert to help alleviate their concerns. Considering these concerns, the ability to plan for and manage global instability is vital for anyone who operates internationally.
Strategies for managing currency risks
Currency volatility is one of the most common risks faced by internationally trading SMEs. This volatility can make it hard for any business to judge the foreign exchange markets, and often, just a handful of days can make a big difference to a company’s bottom line.
To manage this risk and relieve some of the uncertainty around foreign exchange, SMEs should consider working with an expert to develop a simple currency plan with tools to lock in favourable rates for up to 12 months, safeguarding against any negative market movements. Over time, you can use this relationship to build up your knowledge base and currency confidence.
This extra support and understanding of foreign exchange markets can have a big financial impact.
For example, if you’re an SME in Australia and you need to buy goods from America valued at US$10,000, the difference in cost across the year could be very costly. On 4th July 2019, up the purchase was AU$14,285.71. On 2nd September 2019, it became AU$14,925.37, an additional AU$639.66.
By working with a foreign currency expert, you can understand these market movements and use tools to lock in favourable rates for up to 12 months. When you are making regular payments, this gives you the confidence to know your costs throughout the year.
Despite the financial benefits of employing sound currency risk management, our research found that a whopping 76% of SMEs only make transactions when they need to. For many business owners, this could be because they are waiting for the best possible exchange rate, which is not always an option, or they aren’t aware of other options out there.
This is where a simple currency plan comes into play. At OFX, we like to support customers to achieve currency security and cashflow certainty but also have the flexibility to take advantage of favourable market moves, and transfer money when their business needs to, not just when the markets are good.
Understanding the local market is key
Of course, foreign exchange isn’t the only risk SMEs need to consider when trading across borders. Our research shows that SMEs also nominate a lack of knowledge and resources (31.2%), as well as concerns around compliance and red tape (28.5%) as key challenges.
The reality is, each market has its own nuances, and understanding the local market is what will make the process of going global more manageable. Connecting with the various international Chambers of Commerce, which help businesses connect with local trusted people, is a great first step to building a network, growing local knowledge and gaining more tools to manage your risk.
Every new foreign market has a compounding complexity; from a new supply chain, to differing regulations, to new people and cultures. Building genuine relationships with key stakeholders, whether they be customers, regulators or currency providers, can make navigating these barriers and any unexpected red tape far simpler. This may mean growth is slower than anticipated, but it will result in less risk and more sustainable growth in the long run.
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