Ignore Eurozone at your peril – Grant Thornton
DESPITE ongoing uncertainty about the future of the Euro, Mike Redfern, partner at Grant Thornton, believes international trade in Europe is essential for businesses to achieve growth.
Here he gives his top tips for trading with companies in the Eurozone.
AS the Eurozone crisis continues to unfold, playing havoc with stock markets, businesses in Yorkshire are continuing to trade in Europe.
And while local market conditions are not favourable and business confidence is down, one thing is clear, international trade is essential for businesses to achieve growth.
The European Union remains the main importer and exporter of goods for the UK and while there are opportunities across the globe, understanding how to prepare your business in uncertain times when trading with our Eurozone neighbours, is a must.
To assist, Mr Redfern has highlighted five considerations when trading with companies in the Eurozone:
1. Eliminate currency volatility
It is important to consider the impact of foreign exchange fluctuations on product margins and operational input costs as this can have a major effect on the overall financial performance of a business.
In a time of volatility, companies conducting trade in foreign currencies need to appraise whether they have adequate hedging strategies in place to minimise the financial risks associated in dealing in more than one currency.
There are a wide range of financial instruments which can be used to do this but it comes down to assessing the cost of managing the risk against the impact and likelihood of an adverse change. Often clients struggle to understand that hedging is about protecting the company against volatility and not about speculating on the currencies’ direction of travel.
2. Consider alternative suppliers
When operating in an uncertain economic climate it is imperative that businesses have a secure supply chain. This may involve seeking alternative suppliers of products and services. This can in itself create its own challenges, but it can also lead to improved quality, customer service, terms and price.
3. Ensure long-term contracts contain adequate operational protection clauses
There are a number of key commercial aspects to long-term contracts to think about when entering into such arrangements in an unpredictable economic climate.
These include fixed price contracts; the type of currency the contract is transacted in; staged payments, ensuring that there are payments throughout the period of the contract to minimise credit risk; retention of title to safeguard until goods are paid for; and understanding who the party is that you are contracting with.
4. Consider the level of exposure to a single institution
When doing business overseas, a company needs to consider where its cash assets are invested. As we saw at the height of the financial crisis, banks and financial institutions can fail. It is important to assess what cash and investments are held where and the balance of risk versus reward is.
It is crucial to remain flexible and consider whether diversifying the portfolio between a number of institutions and geographies might reduce risk.
5. Ensure foreign currency investment is matched by borrowings
A natural hedge against foreign exchange fluctuations is to match borrowings in the local currency in which a business trades/invests rather than holding the debt instruments in sterling.
As with all business strategies, you need to appraise your own business and consider all of the factors before applying changes. If you are unsure then consult with business advisers with international expertise, such as Grant Thornton.
