Imagine invoicing a client overseas for $100,000, only to receive £3,000 less than you expected. This is not because of a missed payment but because the exchange rate shifted overnight. There is no warning, no apology, just money gone.

It’s a scenario that plays out every day for businesses operating internationally. Even the smallest fluctuations in currency markets can quietly eat away at your profits, inflate your costs, and derail your financial forecasts. If you're not actively managing currency risk, you're leaving your business exposed, often without even realising it.

The reality is that with the global foreign exchange market trading over $7.5 trillion every day (according to the BIS Triennial Survey in 2022), these shifts aren’t rare events. They’re happening constantly, reshaping the value of money across borders.

The good news is you don’t need to accept this risk as "part of doing business". With the right knowledge and tools, you can protect your margins, plan with confidence, and turn FX volatility from a threat into an advantage.

How currency fluctuations impact businesses

Currency exchange rates are an important but often forgotten element of everyday business. While impossible to predict, there are ways and means of fixing and stabilising rates in the longer term. This avoids the nemesis of any business: uncertainty.

Revenue and profit margins

We live in an international marketplace where exchange rate volatility is an everyday challenge for many businesses. High turnover in a foreign currency can quickly shrink once converted back into your home currency, - especially when exchange rates move against you. A sudden currency shift can turn profitable international contracts into loss-makers, and potentially wiping out the entire margin on low-margin exports.

When a business invoices in a foreign currency, even minor short-term movements (0.5% to 1%) can accumulate into significant margin erosion over weeks and months. This is an all-too-common scenario for many finance directors, who receive less than expected revenues when exchange rates fall.

Supply chain costs

When you consider the components of an iPhone, for example, you may have display panels from South Korea, flash memory from Japan, an A-series processor from Taiwan, and raw materials from Africa. As a manufacturer, unplanned increases in the cost of raw materials, parts, or products will have a significant impact on profitability.

Where profit margins tighten, the cost may need to be passed on to customers, which is not as easy as many assume. There will also be scenarios where firms are locked into long-term supply contracts without hedging, which can lead to significant cost overruns. Even those companies buying locally will be at the beck and call of their supplier's cost rises, which may involve currency movements.

Pricing instability

Those companies operating without any form of hedging, whether part of the supply chain or the end supplier of a product or service, may have to constantly adjust prices. This can cause customer confusion and frustration, and sometimes, it may prompt them to look elsewhere. It can also harm brand perception, with concerns that the company is unstable, greedy, or both.

Many exporters face tough choices: either absorb the FX losses or hike prices, which can hurt competitiveness. On the plus side, many B2B contracts include FX clauses, which allow for contract negotiations or cancellations in the event of unexpected currency movements. Ultimately, companies with strong, forward-thinking FX strategies can hold their own in volatile markets, even undercutting competitors during volatile times.

Investment and planning uncertainty

In a perfect world, businesses and individuals could forecast their cash flow months or years into the future. This would fund long-term projects, maintain profit margins, and allow companies to look ahead with a degree of confidence. However, leaving your income to market forces is dangerous, perhaps even bordering on recklessness, as a business owner or finance director.

Historically, there have been numerous scenarios where companies have delayed (or even cancelled) international expansion, M&A activity, or large procurement deals due to FX uncertainty. While it's understandable that investors and board members may view FX exposure as an added business risk, this risk can be greatly controlled.

Why businesses are more exposed today than ever

We live in a world where the global marketplace is accessible in offices, homes, and even on the move. Although this has created significant competitive benefits, especially for smaller companies, for many, it also brings substantial exposure to foreign exchange markets.

Globalisation

As we mentioned earlier, companies cannot control the impact of currency volatility on suppliers. Consequently, even "local" businesses now depend to a certain extent on foreign suppliers and currencies. SMEs and start-ups can now buy and sell internationally far earlier in their growth journeys than in previous years. If ever there was a double-edged sword, this is it!

The impact of globalisation is felt elsewhere, from cross-border e-commerce businesses to a growing trend for international outsourcing and the use of third-party services. Many companies also rely on subscription services, often involving multicurrency billing and multi-market pricing. Having calculated costs and added on profit margins to arrive at a "fair price", these calculations can be very quickly undone.

Rise of volatility

It's safe to say that the last 10 years have seen the emergence of huge geopolitical issues such as Brexit, the Ukraine war, and rising US-China tensions. Then we have the problem of trade tariffs, as the incoming US president looks to protect the US economy, but at what cost? 

This has led to more frequent and more volatile currency movements, with previously "stable" central banks also adding to the uncertainty. Global inflation pressures have caused interest rate divergence across countries, one of the main drivers of FX volatility.

In addition, there have been commodity price swings, which not only impact frontline services and products but have a huge ripple effect across entire economies. We also have the impact of "Black Swan" events such as pandemics and banking crises, which can trigger instant FX volatility due to 24/7 markets and algorithmic trading.

Real-world examples of currency risk

It is helpful to be aware of the theoretical risk of currency volatility, but real-world examples certainly put this into perspective. While there are many examples we could choose from, the Swiss Franc shock and the Brexit vote are two of the more prominent challenges in recent times.

The Swiss Franc shock (2015)

In January 2015, the Swiss National Bank shocked the world by scrapping its cap on the Swiss Franc without warning. This move sent the currency soaring by around 30% in just a few hours. 

It was financial bedlam for businesses as exporters suddenly found their goods massively more expensive overseas, killing demand almost overnight, while importers briefly enjoyed cheaper prices. Many smaller companies, caught without FX protection, were hit hardest - some even went bankrupt. 

The Swiss Franc shock was a brutal reminder that currency risk isn’t just theoretical. When things move, they can move fast, and those businesses without a plan are often the first to suffer.

Brexit vote (2016)

When the UK voted to leave the EU in June 2016, markets were stunned, and the pound reacted instantly. Sterling plunged nearly 10% against the dollar overnight, its biggest one-day fall in history. 

Businesses importing goods faced immediate cost increases, and holidaymakers abroad suddenly lost their spending power. There was a short-term boost for exporters as UK goods became cheaper overseas, but the overall uncertainty wreaked havoc on investment plans and financial forecasts. 

The Brexit vote showed just how quickly political events can hammer a currency and how painful it can be for businesses caught without a strategy to manage the fallout.

How to manage currency risk effectively

Fortunately, managing currency risk isn’t as complicated as it might seem. By taking a few strategic steps, businesses can protect their margins, reduce volatility, and plan with far greater confidence.

Natural hedging

Many companies with international operations try to match revenues and expenses in the same currency wherever possible to limit exposure. For example, if you earn revenue in US dollars, try to pay suppliers or manufacturers in US dollars, too.

Some of the more basic techniques include:-

• Setting up overseas subsidiaries to handle local currency operations
• Pricing products in local currencies for international customers

This technique provides a degree of natural insulation from currency volatility without the need for additional financial products.

Forward contracts

Such is the depth and liquidity of money markets that it is possible to lock in today’s exchange rate for transactions expected to happen in the future (30, 60, 90 days or even longer). This is ideal for budgeting and forecasting cash flow, providing solid foundations going forward.

This is how forward contracts offer a degree of flexibility:-

• You can cover one-off payments
• Or use rolling contracts for ongoing transactions

The benefits are simple but very effective:-

• Removes uncertainty
• Helps maintain consistent profit margins

When talking to clients, this is an area in which there is a significant degree of misunderstanding. Many SMEs mistakenly think forward contracts are "complicated" or "only for big corporations", which is untrue. 

Here at BLK.FX, we work with a range of clients, from individuals to large corporations and everything in between. These are tools available to individuals and companies, and while it is crucial to have a strategy, they are not as complicated as many believe.

Currency accounts

International businesses are now moving towards multiple currency accounts, which provide flexibility on when to convert funds. At BLK.FX, we offer free multicurrency accounts, which help avoid unnecessary conversions and the associated costs.

The strategic advantages of multicurrency accounts include:-

• Hold off converting until rates are more favourable
• Settle invoices in the client’s/supplier’s preferred currency

Due to the instant liquidity available with multicurrency accounts, your business may also be able to negotiate better terms with international partners. The funds are there, and there are no exchange costs, delays, or uncertainty about timing.

Regular FX reviews

In a perfect world, you would be able to set up an FX strategy and keep rolling it over to protect your business. However, what may have appeared a reasonable rate six months ago may not look such a good deal today, and your strategy could require adjustments.

Ideally, a formal review each quarter would be a minimum requirement while continuously monitoring your exposure. It also makes sense to revisit your strategy for any one-off large transactions or new contracts entered into.

Working with an FX adviser, you should look to:-

• Update/revisit hedging strategies on a regular basis
• Review existing forward contracts
• Explore emerging risks (new markets, currencies, political change)

The days of "set and forget" are history. Modern currencies are dynamic, and your approach to FX should reflect this. 

Industry surveys suggest that SMEs with formal FX hedging strategies experience greater cash flow stability and reduced exposure to sudden currency swings.

Mistakes to avoid when managing FX risk

Even innovative, forward-thinking businesses make simple mistakes when it comes to managing foreign exchange risk. You may be surprised to learn that it’s not necessarily the big blunders that cause the most damage; it’s the minor, regular oversights that can reduce profits over time. 

Here are some of the most common FX pitfalls to watch out for and how to avoid them.

Relying on spot rates

Aside from the fact that spot FX rates often expose businesses to hidden fees and worse-than-advertised spreads, this strategy can also back you into a corner, reducing your options. There is a general assumption that spot rates remain relatively steady, but that's not always the case. Consequently, for those waiting to “time the market”, this often results in panicking if the market turns against you.

Many businesses use a hybrid option, securing the bulk of their FX activity using forward contracts while leaving an element to spot rates. While this does reduce the degree of certainty, it can also be beneficial if the short-term rate starts to turn against you.

Ignoring small exposures

Similar to tidal waves slowly (often unnoticed) eroding a cliff face until it crashes down, ignoring small FX exposures can have a similar impact. Understandably, there is a greater focus on hedging “big-ticket” items, but smaller, frequent transactions can cause death by a thousand cuts.

The cumulative effect of losses over dozens of small deals can significantly erode annual profits. Consequently, your FX strategy should include a policy to monitor total exposure, not just larger transactions.

Using banks without comparing alternatives

In business and everyday life, we scan the marketplace for the best loan rates and try to negotiate a fraction of a percentage point off a mortgage deal. This begs the question: Why do some businesses and individuals use banks for currency conversions without comparing rates and fees against alternative vendors?

Some traditional banks apply hidden markups to FX transactions, which can be between 4% and 6%, with fees on top. SME clients are especially vulnerable because many banks automatically assume they won’t shop around for the best rates and deals. It is essential to compare and contrast rates (and fees) against independent FX providers, such as BLK.FX, who typically offer much tighter spreads, reduced costs, and no hidden extras.

No clear FX strategy

Unfortunately, many SMEs operate without a written FX policy, which means there is no guidance to fall back on, leaving decisions to be made on an ad hoc basis. Without a strategy, it is very easy for companies to react to market movements emotionally rather than sticking to a long-term plan. That’s not to discount short-term movements, but it is critical to avoid knee-jerk reactions.

Over-hedging

Surprising as it may seem, over-hedging can, in some circumstances, be as risky as under-hedging. This is why many companies use a hybrid approach, a mix of forward contracts and spot rates. Locking in too much future currency could see you miss out on fundamental market shifts. Looking at the broader picture, it may be helpful to hedge your core exposure, creating solid foundations but leaving a little room for flexibility.

Not reviewing your hedging program

As mentioned earlier, a "set and forget" strategy can be perilous and significantly impact turnover and profitability. As businesses evolve and cash flows change, so must your FX strategy, adjusting in line with your business mix and profile. While there should always be a degree of constant monitoring, at the very least, you should build quarterly FX reviews into your financial calendar.

Managing FX risk isn't about trying to predict the future; it's about protecting your business today, no matter what tomorrow brings. As a business owner or finance director, you can also sleep at night!

Final thoughts

Currency volatility is a constant in today's global economy, but managing it doesn't have to be complex. With the right strategies and support, businesses can mitigate risk and strengthen their financial resilience against market fluctuations.

Proactively managing foreign exchange exposure is no longer optional for internationally focused businesses; it is a critical step towards protecting margins, safeguarding growth, and ensuring long-term stability. It can also provide a competitive edge if approached with the right mindset.

At BLK.FX, we work with businesses to design tailored FX strategies, from forward contracts to multicurrency account solutions, ensuring that your international transactions are efficient, predictable, and cost-effective.

Are you ready to protect your profits and power your growth? Contact BLK.FX today for a complimentary FX review and discover how smarter currency management can transform your international business.