Finding The Risk (And Opportunity) In FX Exposure

Western Union Business Solutions unleashed the results of its research earlier this month to explore how SMEs are managing their cash in an international market. The coverage of the analysis is broad, from addressing these businesses’ overall outlook for the year ahead, to examining their strategies for managing foreign exchange risk, to identifying how firms will invest in new technology.

With so much data in the report, PYMNTS asked Western Union Business Solutions Director of Global Corporate Communications Liesl Smith to walk us through the findings and why such research is key to helping the smaller companies of the world address not only the risks but the opportunities of global expansion.

FX Risk

Among the findings of Western Union Business Solution’s research is the variety of strategies businesses have when dealing with exposure to foreign exchange volatility and risk.

For instance, the rise of the value of the U.S. dollar will inevitably impact SMEs’ international operations in some way; already, more than 90 percent of businesses surveyed said they have seen some kind of effect.

Larger SMEs seem to be the most prepared for these impacts, with 42 percent surveyed noting that they already have a strategy in place to take advantage of the strengthening USD. An additional 47 percent, researchers found, are planning to implement such strategies.

Meanwhile, just 4.3 percent of midsized SMEs — those with between $5 million and $20 million in annual revenue — have identified their strategies in this space.

Smith told PYMNTS that the way companies are managing their cash flow amid foreign exchange fluctuations is one of the more surprising findings from the report.

“This issue around cash management and around addressing the financial risks and opportunities when it comes to dealing with foreign currencies, it could well be because SMEs have less time to be able to spend on dealing with their cash management,” she explained.

That time spent on payment issues related to dealing in multiple currencies was also a key focus of the research. Western Union Business Solutions found that larger SMEs spend an average of 26.4 hours on payment issues, while just eight hours a week are spent on this area by midsized SMEs and only four hours for the smallest of these companies.

“That just gives you an indication of the amount of time, or limit of time, these businesses have,” Smith said. “For me, it’s about these SMEs becoming more competitive in overseas markets; therefore, it’s really imperative that they actually address the financial risks and opportunities when it comes to dealing with foreign currencies.”

Technology

The other big surprise for Smith was the eagerness among smaller companies of the world to invest in technology.

Over the next six months, 74 percent of the larger SMEs said they plan to invest in new technologies; 63 percent of midsized SMEs and nearly half of the smallest ones said the same.

“I think it goes to show the bout of ambition and innovation that SMEs are feeling right now,” Smith stated, adding that there are a number of ways this attraction to technology is impacting the ability for businesses to operate globally.

“I think what you could conclude from the evidence that we have so far is that technology is driving a lot of this innovation and a lot of new thinking within small businesses,” she added. “For example, technology is enabling payments to be much faster globally and online; that’s probably the way things are moving, as opposed to paper check.”

The research also eyed where this technology investment will actually land in the first half of 2016. Nearly a quarter of this investment for all SMEs will end up going towards online sales and online marketing efforts, Western Union Business Solutions found, surpassing investment in export market development tools and new product releases.

Smith described these particular data points as “interesting.”

“Clearly, online and Internet are playing another critical part for these types of businesses,” she said. 

Overall Growth

On a grander scale, Western Union Business Solutions took a look at how SMEs were generally feeling about 2016. The largest of these companies are the most optimistic, analysis found, with 68 percent of firms with between $20 million and $100 million in annual revenue reporting that they expect trade conditions to improve.

That figure compares to the 43 percent of midsized SMEs that agree and the 38.1 percent of micro-SMEs.

While the statistics show that optimism surrounding cross-border trade is far from widespread, the research did conclude that the majority of all SMEs believe that their business costs have fallen over the last year. Two-thirds reported that declining energy costs are lending a hand to their businesses, too.

Their positivity isn’t without caveats, however.

The survey found that nearly 60 percent of larger and micro-SMEs said their top challenge is squeezed margins; meanwhile, the midsized firms say their top cash flow challenge is declining sales revenue.

These are the types of factors that are leading businesses to spend so much time on payment issues, Smith explained, adding that the “volatility of the world” weighs heavily on SMEs’ global financial management processes.

Recognizing that volatility, and the benefits and risks that come with it, is why Western Union Business Solutions wanted to conduct this research in the first place, she added.

“There are a number of businesses that need educating; I would probably say that’s the majority,” Smith said of the companies that come to Western Union Business Solutions. “I think it’s really important they actively address these financial risks and opportunities and get certainty within their budgeting, so they can plan and invest and create the jobs of the future. That’s really important going forward.”