Top ten tips
by Alex Sullivan, Global Head of Corporate Foreign Exchange.
The fashion business is set in the future. Designers are looking ahead to the Spring/Summer 2011 collection and beyond and so are the finance teams who support them. Given the international nature of the fashion industry it is very likely that suppliers, design teams and distributors are situated abroad. This will lead to potential risks from dealing in foreign currency, and subsequently, it can be difficult to protect the profit margin you have so carefully factored into your deals. Managing the foreign exchange element of the transaction protects your business and can be key to successful budgeting.
World First would like to share our top ten tips for taking control of a budget in the fashion industry when goods are purchased from abroad.
1.Sort out the pricing and then set the budget. Look ahead at the known costs and ensure that these costs are covered. Fix these costs in sterling using forward contracts or currency options at the time of setting the budget. See our whitepaper here
2.Hedge no less than 50% at the time you set budget. If you don’t like the idea of buying all your currency in advance with forward contracts or currency options, just make sure you hedge 50%, no less! This simply reduces the effect of large rate moves.
3.Be realistic with rates. Formulate a worst case scenario to budget against. It is normal to set your budget 2-5% below where the exchange rate is currently trading to allow some room for movements that are not in your favour.
4.Do research views from a few different sources to make an informed decision about expected foreign exchange rates. There is no cost to sign up for regular updates from foreign exchange specialists. See World First for our perspective
5.Don’t hang your budget off comments in the press. Remember that a wild statement about which way a rate is going gets media coverage. Small rate movements don’t make stories.
6.Simple solutions are not always the best. Instead of simply fixing future payments at a forward rate, use hedging strategies (i.e. currency options) that are tailored to fit your exposure, currency forecast and risk level. This will enable you to protect yourself from adverse rate movements while still benefitting from favourable rate movements. There are experts to assist. An independent boutique foreign exchange broker, like World First, is like a tailor working to get the perfect fit versus the off-the-shelf product.
7. Take into account how the hedge will affect the business cash flow. Different foreign exchange trades carry different levels of risk and you need to be clear on what implications rate moves will have. Also consider whether you are paying a deposit or getting a credit line but, hedging is flexible, so a strategy can be designed to suit you and your business’s cash flow.
8. Sometimes the best hedge is the one that’s best for cash flow not just for predicted rate moves. A good foreign exchange provider should take all of your company’s business needs into account when assessing which hedge to recommend. Any hedging strategies must fit in with your company’s day-to-day cash flow requirements. .
9. Mix and match. Don’t be afraid to have a variety of products in place for a budget cycle e.g. 30% forwards, 40% options and 30% spot. Different products may suit different elements of the business and diversification can help spread risk.
10. Assess your foreign exchange provider. As you would for any other business before entering into an agreement, carry out the due diligence on your foreign exchange provider. Are they FSA regulated? What is their balance sheet like? Get references from clients that deal with them.
If you would like to discuss your foreign exchange requirements, please contact us:
Tel: 020 7801 9050