There is one big issue that small businesses will no doubt have had their eye on – the general election. At the time of writing, the election is just a day away, but depending on when you read this, the chances are that we’ll be in the midst of political uncertainty, and still unaware which parties will make up the next government. Or maybe one of the parties will go it alone, and try to make their way with a minority. It really is impossible to make a guess at what’s going to happen, so we won’t even try!
Political uncertainty may also lead to economic uncertainty, and for those involved in making international payments – importers, exporters, those paying staff overseas etc. – they’ll be looking closely to see how the pound fares, and how it could affect their business.
For example, if the pound takes a hit, that means they’ll get less for their money when they import goods from overseas, for example. On the flipside, if they’re an on-line business repatriating their funds from abroad, for instance, their money will go further as they’ll be able to get more pounds for their money.
While we wait with interest to see what happens in the UK election, one thing we know for sure is how much the US dollar has fallen in recent weeks. The dollar has been leading the way for much of the year so far, but April was the worst month for USD since Nov 2011. In April, the dollar was 3.51% weaker than sterling.
To illustrate just how far the dollar has fallen, in mid-April the USD/GBP rate was 0.683. Just a couple of weeks later, at the start of May, that rate had fallen to 0.649. To put that in perspective for UK small businesses, those transferring £250,000 would have got $365,700 in mid-April, but $385,000 – nearly $20,000 more – just two weeks later.
That just shows you what a difference the exchange rates can make, and how important it is to be aware of how they can affect your business. That’s where forward contracts and hedging options come into play. If you see an exchange rate has gone in your favour, and you’d like to take that rate now for a transfer that’s due to be made in the future, you can fix it. Then, if the rate goes against you between then and when the transfer is due to be made, you’ll be unaffected, having already agreed a rate in advance. It’s certainly worth thinking about.
We’re all well aware of the bad spell endured by the euro in recent times, but there’s been something of a recovery in the last month. In April, the euro was 0.46% stronger than the pound. Economic news from the Eurozone has been particularly strong in the past few months, signalling a recovery in fortunes. However, there is little reason to get ahead of oneself; unemployment within the Eurozone is still too high with underemployment – people who want more hours – as high as 75% in some countries.
For now though, it’s all eyes on the election, and UK businesses will be interested to see how much it affects them.