Trading in Foreign Currencies...

Whether it’s world events, Brexit votes or just the usual market fluctuation, the profit of any business regularly importing and exporting in different currencies is at the mercy of the prevailing exchange rate.

But with global trade increasing and more businesses becoming involved in overseas transactions, maybe it is time for a different perspective on currency?

The US Dollar is well established as the worlds currency of choice where trade is concerned. There are more dollars in circulation outside of the US than inside its own borders and even China, the emerging dragon of economies, will take a ‘Greenback’ over a Renminbi (RMB) or Chinese Yuan (CNY), their own currency!

So why do we still insist on converting everything back into pounds, especially if a portion of our sales are then overseas and so we convert that sterling price back into another currency to sell it? Maybe it’s the British way, it certainly feels like something that we Brits would do, out of pure patriotism (and stupidity) if nothing else.

Yes, fluctuation can sometimes actually be of benefit. When the pound is weak exports are strong and more competitive, UK companies earning profits abroad make even more profit and tourism gets a boost. And when the pound is strong it is cheaper to import. But the swing between these always means there is a loser somewhere and that doesn’t even consider the additional costs of exchange and bank charges incurred.

Wouldn’t it make more sense for businesses that buy in a currency other than sterling, to hold and sell (at least part of) that stock in the same currency?  There is no practical reason why businesses should not operate using more than one currency. Even the most basic of accounting software will offer multiple currencies for transactions, and banks will happily hold reserves in GBP, EUR, USD, JPY etc. The benefit of this approach is it irons out the cost of exchange and the impact of a fluctuating rate.

So as we face the brave new world of post Brexit international trade, perhaps this should be the time that SMEs in the UK embrace the opportunity presented and start to think and act global and throw off the traditional norms where currency is concerned?

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