Currency fluctuations, to put it simply, is the result of the free floating exchange system, which is normal for most major economies. However, even the most minor of changes can affect your business.
What causes a currency to fluctuate?
The exchange rate of currency against others depends on various factors such as the relative supply and demand for currencies, the economic growth of countries, government policies, inflation outlook, capital flows, unemployment rate and so on. These factors are constantly changing and currencies fluctuate with them. The fluctuation of a country’s currency can have a severe impact on the country’s growth. Depending on whether a country’s currency appreciates or depreciates, it will have both positive and negative impacts on a country’s economy. Let’s take a closer look at the impact of exchange rate on economic growth.
How can it affect your business?
So how does currency fluctuation of a country affect businesses? Currency fluctuations affect all businesses regardless of their trade, but businesses that export or import supplies from other countries such as raw materials and livestock are most severely affected. A change in currency can have a direct impact on a business’s bottom line, especially if the foreign market is involved. As an example, if a Singaporean company projects a profit margin of S$ 7 million, it could reduce to S$ 6.5 million if the Sing Dollar weakens against the Malaysian Ringgit. Inversely, they could see an increase in their profit if the Sing Dollar performs strongly against the Malaysian Ringgit.
However, even if a business does not trade with foreign countries and focuses on the local market, the fluctuation of currencies will still have some impact on them. For instance, if a company were to use trucks to transport its products from a warehouse to its distribution centre, the currency change fluctuates the cost of fuel, thereby impacting the cost of transportation. While you may think these are nothing but small and trivial matters, in large volumes and where logistical issues are involved, the overhead cost could be overwhelming especially for small and medium business owners. However, depreciating currency is not all that bad. In some cases, it can add a much-needed boost for the local businesses.
Beneficial for domestic business
If your business primarily focuses on the domestic market, and the currency of your country depreciates, you might just find yourself with a golden opportunity. When the currency depreciates, the domestic demand increases since most consumers would switch to domestic brands and goods instead of imported ones to avoid paying more tax. A strong domestic currency, on the other hand, can slow down economic growth and restrict employment prospects.
As an example, many Singaporeans may stop buying imported beer such as Sapporo and shift to the local brand, Tiger if the currency of the Sing Dollar depreciates. Of course, this doesn’t only apply to the alcohol industry as all types of industries would be affected, particularly the tourism and hospitality industry.
A weaker currency will also attract more foreign tourists to the country, giving the domestic business a boost. This creates job opportunities for the local populace as startup and domestic businesses can afford to hire more workers. What’s more, it would stimulate local spending and increase their spending capabilities.
Risk of inflation
Nevertheless, it is not all sunshine and roses. Do keep in mind that the resources for businesses are directly impacted by currency fluctuation and are still reliant on the country’s imports for raw goods. Should the currency depreciate too much, inflation and recession would occur, raising the cost of living and further burdening customers. The increase in prices of commodities would affect the amount of profit margin made, slowing the growth and expansion of your business.
While the fluctuation of the currency can’t be controlled, small businesses who can’t afford to deal with the exchange rate of fluctuation can establish a “forward contract”. Forward contract simply means a private agreement between two parties that simultaneously obligates the buyer to purchase an asset, and the seller to sell the asset at a set price at a future point in time. This is implemented because some smaller businesses might lack the back-up finances or capital to deal with the exchange rate fluctuations. This is done to hedge their financial risk and ensure that their business will be protected from significant losses arising from foreign currency fluctuation.
Currency fluctuation is uncertain and there are inherent risks of transferring money from a foreign country back to home, should the currency depreciate, there will be significant losses on the sender’s side.
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