How a Weak National Currency Affects Businesses

by Startacus Admin

Currency value plays a significant role in pretty much everyone’s lives, but few places does it have as much importance as within the world of business. Here the strength or weakness of a national currency can often be reflected in a business’ performance.

The recent decision by British voters to leave the EU after its national referendum has led to the pound sterling to drop in value and become incredibly unstable. This has created a lot of uncertainty for businesses in and working with the UK. A weakened currency can affect businesses in various ways.    

Importing Goods

A lot of businesses rely on importing goods from abroad to create the products they go on to sell for a profit. A weaker national currency results in these imports being more expensive, meaning the company’s profit margins will grow tighter unless a cheaper alternative can be found.

Spending more money on imports will then require your business to sell more of its goods to match its pre-currency devaluation levels. Paying foreign suppliers in their own currency will lead to lost money, as it will go through the cost of converting, but if your company can pay in its own national currency then less will be lost.    

Exporting to Clients

As well as importing goods, due to the increased global connectivity of businesses, many will rely on international clients. Exporting goods abroad when the national currency has dropped in value can actually have somewhat of a positive effect.

If the country where you are exporting to has a strong currency, it may work out cheaper at their end, as converting to your national currency will cost less. This can encourage sales and make up for anything lost through the reduced national currency value.

Interest Payments

When dealing with clients paying from abroad and in different currencies, the interest can be paid in the foreign currency. When the national currency has depreciated this can be a positive thing, the stronger foreign currency converting to more, benefitting your business.  

However, when paying interest on amounts owed to foreign businesses, this can be more and cost your company. There are ways to expand and take advantage of the situation though, such as trading currencies through brokers. In order to help boost your profits, investing either in the national currency at its weakest before selling later, or putting profits into a safe haven currency are two possible ideas.

Contracts

There are ways that many businesses protect themselves against a negative impact from currency fluctuations when dealing with other businesses abroad. One way is to set up fixed contracts when buying or selling goods and services outside their home country.

With fixed contracts, temporary fluctuations in currency value will have little effect. Buying imports prices will be set for around 12 to 18 months ahead, with future options available to hedge against any potentially dramatic movements in the exchange rate, such as Britain actually leaving the EU.

If you run a business, then it is important to be aware of all these factors that can affect it when your national currency is weak.   

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Published on: 20th July 2016