COVID-19 isn’t the only big unknown we currently face; EU Transition is now clearly on the horizon. Manufacturing Advisor Phil Anders highlights the need for manufacturers to consider their financial model for imports and exports, plan for different deal scenarios and explore new avenues for foreign exchange to manage uncertainty.
With everything that’s going on at the moment with COVID-19 and the race to get back to normal trading conditions, you could be forgiven if the UKs transition out of the EU had slipped your mind. But it’s really not far away. The transition period is due to end on 31 December 2020, and the government has already said it’s not open to an extension. Along with a deal with Europe, negotiations for free trade agreements are now underway with the US, Australia, New Zealand and Japan.
As difficult as it is to juggle these two historic events at once, manufacturers can’t wait for the COVID-19 crisis to start winding down before planning strategically for life outside of the EU. It’s important you take the time to consider what possible trade scenarios you could face, especially if your supply chain is heavily dependent on European markets. With the supply of materials already disrupted and prices rising, now is not the time to be caught out.
The right time to trade
The truth is, we don’t yet have any clear answers for what’s going to happen when we leave the EU. Add to that the ongoing fallout from COVID-19 and we could be heading into a period of long-term uncertainty. So how do you cope with this uncertainty effectively when buying and selling across foreign markets?
One of the first things to consider is your financial strategy for foreign exchange (FX or Forex). In its simplest form, FX is the global market for exchanging one currency for another to enable buying, selling or settling debts in a foreign country. If you want to import goods from a company in Italy you will need to pay for them in Euros, and to export your goods in the opposite direction the buyer will need to pay in Sterling.
There are a number of determining factors that affect supply and demand for currency, including interest rates, trade, economic strength, local and international policy and the geographical political situation. In times of uncertainty, currency values can fluctuate unpredictably, so knowing the right time to buy and sell becomes crucial. Without careful planning, you could lose out on unfavourable exchange rates in transactions or leave yourself exposed to significant risk by holding foreign currency in a volatile market.
Most businesses use their bank to deal with FX much the same way as we do at a bureau de change when we go on holiday. This is called the cash or spot market – you make your exchange ‘on the spot’ based on the exchange rate at the time. However, there are alternative strategies that could help you to reduce risk and maximise the cost-effectiveness of imports and exports. These include:
- Forwards: If you have a clearly defined order pipeline, you could decide to set a forward contract between yourself and the party you’re trading with. Rather than a trade on the spot market, this is a contract that represents a claim to a certain amount of currency, a specific price per unit and a future date for the trade to be settled. In other words, it allows you to lock in a set price for a set period of time, which protects you from fluctuations and helps you to plan out your cashflow with more certainty.
- Futures: The futures market is another way of locking in a fixed price but involves trading publicly on the commodities or currency market, rather than privately between two parties. The price and date is set by regulated market traders. Futures can’t be customised like forward contracts, but there’s no risk of someone defaulting on the agreement.
Both futures and forward contracts are binding and are typically settled for cash at the exchange upon expiry. Both provide some protection against risk when trading currencies and can be used to hedge against future exchange rate fluctuations.
- Hedging: You can also hedge your bets by using a broker to fix the rate at which you agree to complete a transaction. For example, if you’re looking to purchase goods in a volatile market where the currency is likely to fluctuate, you can fix the exchange rate at which you’re prepared to buy so that the transaction only takes place when the target exchange rate is reached. You can also set a limit for the lowest exchange rate you’re willing to accept.
A lot to take in?
Strategies for dealing with FX should be considered as part of your overall business strategy and should play an important part in the decision-making process when buying or selling goods overseas. Understanding how this fits in to your business model is something all organisations should be factoring in when looking at the outcomes of Brexit and the new models of trading overseas. t.
This isn’t a simple job. It involves taking a detailed look at the volatility of markets, changes in fiscal policy and an analysis of different future scenarios. A lot of this is intangible – you’re working with ifs and buts and trying to make an informed judgement. As a first step, all businesses should sign-up to the www.gov.uk/transition website where you can answer a short questionnaire to receive bespoke guidance based upon your business size and sector.
If you’re financially-savvy or have a dedicated financial director, you may be able to do this yourself, but most SMEs will have to rely on external support . Your bank may be able to help, but that is just one avenue available to you. There are also specialist brokerage services that could offer more expertise in the markets you trade in.
Access grant funding
If you’re not sure where to start, you may be eligible for a grant from our Manufacturing Growth Fund to bring in an expert consultant who can review your current import/export strategy and advise on the best ways to manage risk and maximise returns going forward. The Fund is open to all SME manufacturers across the North West.
We’re re-designing our services to help you
As we emerge into this brave new world, we’re busy looking at new ways to provide manufacturers with remote one-to-one support. If you need help with any of the issues raised above, contact us and one of our specialist advisors will be in touch.
Access the latest guidance on the EU Transition from toolkit
More info on how to import goods from EU to UK after transition: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/901061/How_to_import_goods_from_the_EU_into_GB_from_January_2021.pdf
More info on how to export goods from EU to UK after transition: