For many B2Bs, international trade is vital to the continued liquidity of your business. A large number of enterprises are involved in the production and manufacturing industries, and for these companies materials are sourced from around the world, whilst sales are made to countries across the globe.
As a result, the UK exchange rate can have a massive impact on how well your business performs. Any depreciation can force up the price of imports and lower your profit margins, whilst appreciation can serve to make your business less competitive in the global marketplace.
The extent to which these fluctuations can impact your business means that it’s very important to understand how exchange rates impact domestic commerce. Practically applied, this knowledge can help you to pinpoint the best markets around the world for cheap imports, and the most lucrative countries to export to.
So how does it work?
The Effect of Depreciation
Any depreciation in the value of the pound tends to hit the UK economy in two key ways: it makes exports cheaper, and drives up the price of imports. For businesses that rely heavily on sales from abroad, this makes it an ideal trading environment.
The simplest way to illustrate the effect on those companies that import is to use some examples. In January 2007, the exchange rate was £1 to €1.50. By January 2009, this had fallen to €1.10. Whilst holidaymakers bemoaned this drop in value, exporters welcomed it with open arms.
Their joy is simple to understand. Let’s imagine that you’re a company that sells engines abroad. In the UK, car manufacturers buy these for £2,000. In 2007, European customers would have paid €3,000 to do the same. By 2009, however, these same overseas customers would have paid €2,200 thanks to depreciation, making European exports far more competitive than two years previously.
This would have meant one of two things for British producers. Firstly, they could have sold the car for the same price in the UK, in which case their product would have been more competitive and sales would likely have been higher. Alternatively, they could have kept their European prices the same, and increased their profit margin on each individual sale. Either way, the chances are that they would see an increase in profits thanks to the effects of depreciation.
The Effect of Appreciation
For companies that rely on imports, the appreciation the pound is currently experiencing is preferable to depreciation.
