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FeedsHome: Issue 1 2010 › Lead Story › World of fluctuations
World of fluctuations
29/01/2010 | Channel: E-Business / IT, Business
Rocco Magno, director of American Express FX International Payments offers advice on how UK SMEs can save both time and money by effectively managing their international payments process
Worth around £200 billion (according to the British Chamber of Commerce), every year and equating to 17 per cent of the country’s total GDP, UK business abroad is big business. It is therefore vital that companies trading internationally have a well thought out strategy around international payments and foreign exchange. This is particularly important in the current economic climate, where effective risk management can be a means of making valuable savings and improving cash flow.
A recent study by American Express FX International Payments found nearly two fifths (39 per cent) of UK SMEs now conduct international business of which over one in three UK SMEi business leaders (36 per cent)ii cite ‘currency fluctuations’ as their overriding number one concern. Despite currency fluctuations being the key concern, a surprising 56 per cent of SME business leaders admit they do not manage their financial risk at all, and just 44 per cent are currently protecting their margins against fluctuating exchange rates.
By not protecting margins against fluctuating exchange rates, the equivalent of over half a million companies (574,676)iii are leaving themselves wide open to volatile market conditions. In a negative currency situation, unprotected SMEs could potentially put themselves at risk of up to £41,883iv per year. This could collectively set the UK economy back by an estimated £24v billion per annum in missed savings.
UK business abroad is a big opportunity, however trading internationally can often be a complex process, and it’s therefore not surprising that 15 per cent of SME business leaders who do regularly trade internationally say they find it difficult or extremely difficult to navigate the international payment process.
However, with so much capital potentially at stake, it is imperative that SMEs seek the right guidance in order to help manage their financial risk as much as possible. This is not only to protect themselves against negative currency fluctuations but more importantly to enable them to have increased foresight and control. For example, by purchasing a forward contract and locking in the best exchange rate at a specific point in time, business leaders are able to manage their cash flow and plan ahead more effectively, and in today’s market, foresight can give the edge over competitors.
The study of over 500 UK SME business decision makers suggests that nearly £42k per SME could be just the tip of the iceberg in missed savings. In fact, of the 44 per cent of businesses that state they are currently managing their risk, many are not doing so in the most time or cost effective way possible.
Trading internationally can be a timely process for SMEs with the study showing that nearly half of SMEs (47 per cent) are dedicating between two and five working days per month to the process. Currently only 19 per cent of SMEs utilise a foreign exchange specialist to manage their international payment process online. This means that up to 81 per cent of SMEs could potentially be missing out on the time efficiencies by online platforms. Most foreign exchange specialists provide online platforms with the average international transaction time taking just two minutesvi.
Not only are many businesses at risk of wasting valuable man hours on elongated payment processes, the average SME queries five international payments per year potentially racking up additional costs in investigation fees, costs which are often not incurred with an online IP provider.
Many small and medium-sized business leaders are time-poor. Online transactions are not only more time efficient but can offer the decision maker the flexibility of processing international payments at a time that suits them which can often be out of hours.
SMEs are an important sector for both American Express and the UK economy, making up over 50 per cent of the private sector workforce and representing half of the UK’s GDP. As international business becomes increasingly common practice for SMEs, it is important they seek the right advice, not only to minimise their risk against factors outside of their immediate control but also to enable them to plan and grow their business effectively.
i The term ‘SME’ is based on the European definition of a SME, that is a company with less than 250 employees, an annual turnover not more than £24 million or an annual balance sheet not more than £16 million
ii This statistic and subsequent statistics are based on the results of research conducted amongst a sample of 500 UK SME business decision makers
iii Based on the number of SMEs that are conducting international business (39 per cent) cross referenced with those who are not managing their financial risk (56 per cent), cross referenced with the number (and relevant size) of SMEs in the UK as according to the Office of National Statistics. Source: the Office of National Statistic’s ‘UK Business Activity, Size and Location Report September 2008’
iv This figure is based on the average SME’s saving if they had purchased a forward contract and had locked in the US Dollar from July 2008. Assuming the client had an exposure of $250,000 over a period of ten months, the savings would have been made as follows:
a) If client would have booked forward in July 2008 (Rate = 2.0153).
GBP Cost = £124,051.01
b) If client would have booked $25,000 each month spot. GBP Cost = £149,983.55 (Loss against forward in July 2008 = £25,932.54 = -20.90 per cent)
c) If client waited until the final bill needed to be paid in April 2009 (Rate = 1.5066). GBP Cost = £165,936.55 (Loss against forward in July 2008 = £41,882.54 = -33.76 per cent)
v £24 billion is based on the number of SMEs in the UK that are trading internationally but not managing their risks multiplied by the average cost saving that an average SME would benefit from if they had managed their risk, which is £41,883. The definitive figure is £24,069,151,557
vi Based on the time it takes for the average international transaction via the American Express online FXIP platform
Case study
Nick Wintle is managing director of IGS UK (International Graphics Sourcing), a company that specialises in sourcing, purchasing and facilitating products relating to the digital print industry.
As a result Nick conducts international trade with both suppliers and clients across Europe and spends approximately £3 million per annum on purchasing currency and the same on incoming currency. Nick founded the company back in 2006 and now employs a staff of ten.
Whilst Nick has extensive experience in trading internationally, he still manages his financial risk carefully and values specialist advice. Nick explained: “Last September, we purchased over $1 million in forward contracts when, at the time of purchase, the contract rate was around 1.9. A few months later, as the world was gripped by credit crunch, the value fell to below 1.45. By using American Express FXIP, we were able to fix and protect our margins to the value of £450,000. This is obviously a significant amount for a small business and savings that can be invested elsewhere within the business.”
Rocco Magno
Rocco Magno has been the director of American Express FX International Payments for over five years. During this time, Rocco has helped build the FX International Payments business at American Express Global Foreign Exchange Services, assisting UK SMEs and mid-sized companies with their international payments. Within his role, Rocco is responsible for developing customer acquisition and account development strategies for the FX International Payments product, leading a team of over 30 highly skilled sales and account development professionals.
American Express Global
Foreign Exchange Services
American Express Global Foreign Exchange Services offers a number of business-to-business services alongside its on-airport retail service. The FX International Payments business provides a solution for SME and corporate customers to make international business-to-business payments via an online solution
www.americanexpress.co.uk/fxi
A recent study by American Express FX International Payments found nearly two fifths (39 per cent) of UK SMEs now conduct international business of which over one in three UK SMEi business leaders (36 per cent)ii cite ‘currency fluctuations’ as their overriding number one concern. Despite currency fluctuations being the key concern, a surprising 56 per cent of SME business leaders admit they do not manage their financial risk at all, and just 44 per cent are currently protecting their margins against fluctuating exchange rates.
By not protecting margins against fluctuating exchange rates, the equivalent of over half a million companies (574,676)iii are leaving themselves wide open to volatile market conditions. In a negative currency situation, unprotected SMEs could potentially put themselves at risk of up to £41,883iv per year. This could collectively set the UK economy back by an estimated £24v billion per annum in missed savings.
UK business abroad is a big opportunity, however trading internationally can often be a complex process, and it’s therefore not surprising that 15 per cent of SME business leaders who do regularly trade internationally say they find it difficult or extremely difficult to navigate the international payment process.
However, with so much capital potentially at stake, it is imperative that SMEs seek the right guidance in order to help manage their financial risk as much as possible. This is not only to protect themselves against negative currency fluctuations but more importantly to enable them to have increased foresight and control. For example, by purchasing a forward contract and locking in the best exchange rate at a specific point in time, business leaders are able to manage their cash flow and plan ahead more effectively, and in today’s market, foresight can give the edge over competitors.
The study of over 500 UK SME business decision makers suggests that nearly £42k per SME could be just the tip of the iceberg in missed savings. In fact, of the 44 per cent of businesses that state they are currently managing their risk, many are not doing so in the most time or cost effective way possible.
Trading internationally can be a timely process for SMEs with the study showing that nearly half of SMEs (47 per cent) are dedicating between two and five working days per month to the process. Currently only 19 per cent of SMEs utilise a foreign exchange specialist to manage their international payment process online. This means that up to 81 per cent of SMEs could potentially be missing out on the time efficiencies by online platforms. Most foreign exchange specialists provide online platforms with the average international transaction time taking just two minutesvi.
Not only are many businesses at risk of wasting valuable man hours on elongated payment processes, the average SME queries five international payments per year potentially racking up additional costs in investigation fees, costs which are often not incurred with an online IP provider.
Many small and medium-sized business leaders are time-poor. Online transactions are not only more time efficient but can offer the decision maker the flexibility of processing international payments at a time that suits them which can often be out of hours.
SMEs are an important sector for both American Express and the UK economy, making up over 50 per cent of the private sector workforce and representing half of the UK’s GDP. As international business becomes increasingly common practice for SMEs, it is important they seek the right advice, not only to minimise their risk against factors outside of their immediate control but also to enable them to plan and grow their business effectively.
i The term ‘SME’ is based on the European definition of a SME, that is a company with less than 250 employees, an annual turnover not more than £24 million or an annual balance sheet not more than £16 million
ii This statistic and subsequent statistics are based on the results of research conducted amongst a sample of 500 UK SME business decision makers
iii Based on the number of SMEs that are conducting international business (39 per cent) cross referenced with those who are not managing their financial risk (56 per cent), cross referenced with the number (and relevant size) of SMEs in the UK as according to the Office of National Statistics. Source: the Office of National Statistic’s ‘UK Business Activity, Size and Location Report September 2008’
iv This figure is based on the average SME’s saving if they had purchased a forward contract and had locked in the US Dollar from July 2008. Assuming the client had an exposure of $250,000 over a period of ten months, the savings would have been made as follows:
a) If client would have booked forward in July 2008 (Rate = 2.0153).
GBP Cost = £124,051.01
b) If client would have booked $25,000 each month spot. GBP Cost = £149,983.55 (Loss against forward in July 2008 = £25,932.54 = -20.90 per cent)
c) If client waited until the final bill needed to be paid in April 2009 (Rate = 1.5066). GBP Cost = £165,936.55 (Loss against forward in July 2008 = £41,882.54 = -33.76 per cent)
v £24 billion is based on the number of SMEs in the UK that are trading internationally but not managing their risks multiplied by the average cost saving that an average SME would benefit from if they had managed their risk, which is £41,883. The definitive figure is £24,069,151,557
vi Based on the time it takes for the average international transaction via the American Express online FXIP platform
Case study
Nick Wintle is managing director of IGS UK (International Graphics Sourcing), a company that specialises in sourcing, purchasing and facilitating products relating to the digital print industry.
As a result Nick conducts international trade with both suppliers and clients across Europe and spends approximately £3 million per annum on purchasing currency and the same on incoming currency. Nick founded the company back in 2006 and now employs a staff of ten.
Whilst Nick has extensive experience in trading internationally, he still manages his financial risk carefully and values specialist advice. Nick explained: “Last September, we purchased over $1 million in forward contracts when, at the time of purchase, the contract rate was around 1.9. A few months later, as the world was gripped by credit crunch, the value fell to below 1.45. By using American Express FXIP, we were able to fix and protect our margins to the value of £450,000. This is obviously a significant amount for a small business and savings that can be invested elsewhere within the business.”
Rocco Magno
Rocco Magno has been the director of American Express FX International Payments for over five years. During this time, Rocco has helped build the FX International Payments business at American Express Global Foreign Exchange Services, assisting UK SMEs and mid-sized companies with their international payments. Within his role, Rocco is responsible for developing customer acquisition and account development strategies for the FX International Payments product, leading a team of over 30 highly skilled sales and account development professionals.
American Express Global
Foreign Exchange Services
American Express Global Foreign Exchange Services offers a number of business-to-business services alongside its on-airport retail service. The FX International Payments business provides a solution for SME and corporate customers to make international business-to-business payments via an online solution
www.americanexpress.co.uk/fxi
