Managing currency fluctuation risks imperative for SMEs

With boundaries shrinking rapidly and an increasing number of SMEs in India reaching out to emerging markets to increase their export base, it has become critical for them to pay attention to not only expanding their reach, but also managing the risks that accompany market expansion. One of the most important aspects that need attention is managing financial risks. Having a smart strategy to mitigate the risks involved during volatile currency movements will help the SME exporters.

Sharp currency fluctuations have a considerable impact on the business of exporters, especially in the SME segment. Therefore, there is a greater need for small units to guard themselves against the risk of fluctuations in exchange rates.

Covering currency fluctuation risks: A necessity

SMEs venturing in the competitive export market also run the risk of being left exposed to the changes in exchange rates, which can adversely affect their bottom-lines. Therefore, it is important for SMEs to manage their foreign exchange risks efficiently and effectively.

“Depreciation of the US dollar against rupee causes the export value realisations to drop down sharply, thereby leading to the erosion of the gross margins of exporters. Therefore, exporters should first determine their exposure to the foreign exchange risk and then undertake measures accordingly to deal with adverse fluctuations,” said OP Agarwal, chairman of AMBO Exports, a small-sized tea exporting unit in Kolkata.

Experts recommend exporters to first assess the type of market they are trading in and then analyse if they can pass on currency losses to customers by raising their prices.

“To arm themselves against the risk of exchange rate fluctuations, exporters need to evaluate their cash flow position, examine the degree of influence on their profitability during fluctuations in exchange rates and analyse all possibilities. While sealing a deal with an overseas client for delivery of their goods, exporters must negotiate the clauses and must keep the option of entering into a price variance with their customer based on exchange fluctuations,” said Vishnu Bang, senior analyst at FutureSafe, a securities firm in Hyderabad.

With an effective and smart strategy in place, exporters can effectively manage currency fluctuations risks. The key is to ensure that all decisions involving payments, contractual terms, financial hedging and the use of derivatives are taken after assessing important factors. It is imperative for SME exporters to be armed with the right information to manage currency risks, both at strategic and transactional levels.

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