Ross Peat is a member of the Auckland Regional Economic Development Forum, is on AucklandPlus's advisory board and is former Managing Director of Microsoft New Zealand.
When should exporting SMEs take a more organised approach to foreign exchange?
As a natural consequence of globally connected markets and consumers, many New Zealand SMEs are buying or selling products and services internationally. Directly or indirectly this means that foreign exchange (FX) transactions, costs and risks are an everyday component of their business model.
When these transactions become a significant component of the revenue or payment stream - a very individual judgement in itself - then an SME should incorporate an FX strategy into its business plan. A primary reference point for this plan is the selection of an operating currency, and very typically this will be the NZ dollar.
As New Zealand small and medium businesses increasingly look to overseas markets the management of FX risks and costs will be an important component of the business model. There are a variety of strategies and services now available that give business owners and managers genuine and competitive choices on how they can better manage their FX risks and reduce their FX costs.
Some SMEs choose a certain currency to operate in. Is this a good option?
However if more than 50 per cent of your revenues or payments are, for example, in Australian dollars (AUD) or US dollars, then it may make sense to operate the business in that currency. In some businesses a mix of multiple currencies comprises 50 plus per cent of their business in which case the operating currency could either be the dominant overseas currency or the NZ dollar (NZD). In both these scenarios, professional FX advice is recommended.
How do small exporters typically manage their FX?
Given the volatility of currency markets, risk rather than cost is the most likely driver of FX strategy and the assessment of the tools to manage FX. Strategies to manage risk range from simply taking the FX 'going rate' on the day of any transaction, through to more sophisticated hedging and futures instruments with which future exchange rates can be fixed.
In our experience, small businesses typically take the "going rate" on the day of transactions and accept the consequences of that, usually in the expectation that the exchanges rates achieved over a quarterly or annual period will balance out. However if in any particular period the exchange rate sustains a negative trend the business impact can be very high.
For example if your costs are all in NZD but the business is billing mostly in AUD, and the NZD strengthens significantly (as it has done in the last three months) then the business must be able to manage the negative margin impact as fewer NZD are returned to the business for sales in AUD. Conversely, gains can also occur as has happened in the last month for businesses operating in NZD and billing in USD.
How do medium sized business manage currency risk?
For medium-sized businesses with significant overseas revenues or payments, a hedging strategy is recommended. A typical strategy would involve the purchase of Contracts For Difference (CFDs) which allow the business to lock in future exchange rates, usually aligned with their revenue and payment forecasts. Of course there are transaction and advisory costs associated with this strategy and ultimately it is a business decision to weigh these costs against the benefits to the business of exchange rate certainty.
What is KlickEx trying to do to help businesses manage currency risk?
Recognising the challenge that FX creates for businesses, KlickEx has new FX and payment services that can help SMEs (and individuals) lower their FX transaction costs, especially for low value payments, while providing much greater transparency on FX transactions. KlickEx now makes it possible to send NZ$10 to Australia for about the cost of a postage stamp.
With these lower costs, it can be simpler and cheaper for an SME to make multiple smaller transactions across a period and achieve an average rate across, say, a month as opposed to taking the rate on one day.
For example a business which has a $10,000 trans-Tasman monthly payment may choose to remit $2500 per week and therefore achieve the average exchange rate across those 4 weeks. This approach can help reduce very short-term volatility and given that there are typically no transfer fees with the KlickEx service, the number of transfers made does not impact on transaction costs.
Next week, we take a look at the kind of flexible working arrangments SME owners are offering their staff and themselves in the current market. Surely a perk of running your own business is an opportunity to have more freedom on how you work and when and you should be offering this to your staff too. Tell us your stories.