ow Small Businesses Can Protect Themselves From Currency Swings

What happens to a profitable order when the exchange rate moves before the bill is paid?

A furniture retailer in Leeds finds out. It orders $250,000 of stock from a supplier in North Carolina, payable in 90 days. With the pound at $1.25, the bill comes to £200,000.

Three months later sterling has slipped to $1.18. The same invoice now costs nearly £212,000. Sales, supplier and product are unchanged. The profit simply moved with the exchange rate.

That is the most common FX risk a small business faces, and it stays invisible until the invoice is settled. The US International Trade Administration says smaller firms often overlook it, and that the aim of managing it is to reduce unpredictable losses, not to profit from currency moves.

The first step is to measure the exposure. List every foreign-currency payment and receipt expected over the coming months, and separate signed, certain amounts from forecasts. A simple spreadsheet with the currency, amount and due date of each item is enough to show where the risk sits and how large it is.

Importers usually lose if their home currency weakens before they pay. Exporters lose if the customer’s currency weakens before they are paid.

The second step is to offset what can be offset naturally. A firm that both pays and receives dollars can hold a dollar account and use one flow to cover the other, converting only the difference.

Invoicing in pounds where customers accept it, or buying supplies in the same currency as sales, shrinks the exposure further. These steps cost little and reduce what needs protecting.

Currency hedging covers what is left. For a signed invoice with a fixed amount and date, the standard tool is a forward contract, which fixes today the rate for a future payment.

Suppose the Leeds retailer had agreed a 90-day forward at $1.2480. Its bill would have been fixed at about £200,300, saving roughly £11,500 once sterling fell.

The trade-off cuts both ways. Had sterling risen to $1.32, the unhedged bill would have been about £189,400, and the forward would have cost roughly £10,900 more. The forward did not lose that money. It bought a known cost.

Forwards carry obligations. The contract stands even if the order is delayed or cancelled, and some providers ask for a deposit or extra collateral if the rate moves sharply.

For payments that are likely but not certain, an option may suit better. It gives the right, not the obligation, to exchange at a set rate, for a premium paid upfront, much like insurance. If the rate moves in the firm’s favour, it can let the option lapse and convert at the better market rate.

Many firms hedge in layers: most of their signed invoices, less of what is expected in the next few months, and little beyond that. A short written policy, approved by the owner or finance lead, keeps those decisions consistent when markets turn noisy.

“Hedging a business and trading currencies are different activities, and it is worth keeping them apart,” said a member of the ABHFX Market Research Desk. “A company protecting the cost of its stock needs a provider that offers forwards and payment services for that purpose, not a leveraged trading account.”

None of this needs a view on where rates are heading. Good currency risk management accepts that they are unpredictable and protects the margin either way.

The ABHFX Market Research Desk covers the macro and policy events shaping currency, commodity and index markets.

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