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Drop in exchange rate could cost companies thousands

On 1 May, $1 million was worth approximately £760,000 but by 30 July it was worth approximately £825,000 due to the changes in the USD/GBP exchange rate.

A UK business spending a million dollars could find that it costs approximately £65,000 more to make the same transaction just weeks apart.

David Hough, a partner at Blick Rothenberg said, “The pound has dropped by approximately 8% against the US dollar since the beginning of May which is bad news for businesses that import goods or services from overseas.”

He added, “Companies that incur significant amounts of expenditure in foreign currency will be finding the devaluation of the British pound reduces their profibility unless additional costs can be passed onto the end consumer.”

Rising import costs will increase cost inflation which may ultimately increase the cost of UK goods and reduces the demand for UK exports.

“Exporters may experience a temporary boom in sales at the low value of the pound will mean that overseas businesses can make purchases from UK companies at a lower cost to them when the pound sterling price is converted into US dollars or Euros, potentially making British businesses more favourable suppliers than overseas competitors. However, over a longer period, rising import costs will increase cost inflation which may ultimately increase the cost of UK goods and reduces the demand for UK exports.”

David said, “On Thursday the Bank of England downgraded the UK’s growth forecast but the potentially negative impact on the exchange rate against the USD was mitigated by a 0.25% reduction in interest rates by the US Federal Reserve the evening before.”

“Traditionally companies concerned about movements in exchange rates may have turned to forward contracts to fix the exchange rates of their sales or purchases. Often, this does not result in the most favourable potential rate to the company, but it does give businesses the opportunity to manage their cash flow with some certainty on their actual inflows and outflows, and therefore maybe a preferred option amid business concerns of a no-deal Brexit.”

For more information, please contact David Hough.