How To Protect Your Company Profit
Every company that imports and agrees a price on an order for future delivery is going to be exposed to currency exchange rate changes. Usually the case will be that you’ll have to pay the factory a deposit so they can start manufacturing the product and when manufacturing is complete, the balance will need to be paid. This time from agreeing the contract, to actually receiving the goods may be months.
Of course in that time the rates of exchange will be changing every day. This may be in your favour or not. If the rates move against you that product has now cost you more and in turn reduced your profit margin. With the market as flippant as it is at the moment and no one really knowing what ‘Article 50’ and ‘Brexit’ mean, how can you protect yourself?
One option is booking a forward contract. This simply is securing a fixing amount of currency to buy or sell, on an agreed date, at a fixed rate of exchange. You can book a forward contract up to a year in the future. What this in effect does is answer the question: what will this currency cost on this date in the future? This can be done for either buying or selling currency and works the same way.
As an example: you have agreed to do a creative job for a client based in Europe and agree the price in their local currency. Payment terms might easily be up to 60 days. So while you wait for the client to make that payment to you, your profile is at risk as the exchange rates are moving all the time. Securing a forward contract to sell the Euros for a future date will protect you and the company profit.
Forward contracts can of any size and forward to any date within 12 months. So even if you undertake one contract a year or a hundred, you can manage each one separately and ensure you are trading as safely and smart as possible.
Theresa May has highlighted a timescale that stretches far into the future as to when we will leave the European Union. It will be interesting to see what other speakers pronounce during the days, weeks and months ahead and how this impacts the confidence in the pound.
How protected are you and your clients? Understanding the businesses requirements going forward and agreeing a strategic plan can make the difference between profit and loss. Especially as the impact of ‘Brexit’ is still very much unknown.