The growth and profitability of internationally trading SME manufacturers could be affected by volatile exchange rates ahead of the UK's EU referendum, according to research by foreign exchange service providers, World First.
The nationwide survey of more than 1,000 senior decision makers at UK-based SMEs making cross-border payments found that despite 83% of SMEs operating in the manufacturing industry fearing that currency volatility from the EU referendum will impact their business, 35% are failing to take any notice of foreign exchange markets with 37% also believing that having a currency strategy is not important.
The research also revealed the extent to which manufacturing SMEs remain dangerously exposed to currency fluctuations with just under half (47%) admitting they have been caught out by a sudden movement in exchange rates and one fifth having been severely impacted by market volatility.
The findings also highlighted a stark lack of appreciation on how exchange rate movements impact their business, with 43% admitting they did not fully understand this and almost half (49%) that currency markets ‘scare’ them.
Despite this, 83% recognised that having a proper currency strategy could improve profitability suggesting that for many SMEs in the manufacturing industry, currency confusion and a failure to effectively manage their FX exposure is impacting the bottom line.
Chief economist at World First, Jeremy Cook commented: “2015 was one of the most unpredictable years in currency market history and there is little reason to expect change in 2016.
“With the EU Referendum hanging like an economic Sword of Damocles, there is an enormous degree of uncertainty and concern in markets and therefore it’s crucial that any business operating internationally has a clear strategy for managing their currency exposure.
“One only has to look at the precedent set by the Scottish Referendum, which saw sterling lose around 6.5% against the USD in the two months before the vote, to realise how great a threat this could be to the mini-multinationals who don’t have the balance sheet strength to absorb such major shocks.
“This situation is made all the more grave given the widespread lack of appreciation on how such rate movements impact the bottom line.”
Jonathan Quin, CEO of World First said: “Given that SMEs are the engine-room of the UK economy and key to our international trade, more needs to be done to ensure they are adequately protected from currency swings caused by events such as the EU Referendum.
“Specifically, while there is a lack of clarity about the exact timings of the EU Referendum, SMEs should take the initiative now to help mitigate against the risks of currency volatility that we’ll likely see in the run up to the eventual day votes are cast.
“Supporting UK SMEs on the journey to become mini-multinationals is at the heart of the government’s plans to rebalance the economy and to drive the competitiveness of our exporters.
“Therefore, collectively, the industry and policy makers need to better educate businesses on the benefits of a well-managed currency strategy, as well as providing specialist advice and products that can help our nations’ business thrive on the international stage.”
The survey also revealed that the Euro (54%) was by far the most common currency the UK’s SMEs buy when transferring from Sterling, followed by the US Dollar (32%), the Australian Dollar (2.3%), and the Chinese Renminbi (1.7%).