Changes in the value of the rand impact all businesses. The fact that we live in an emerging market means currency volatility will be around for the foreseeable future. We can’t do much about it, but there are measures you can take to better manage fluctuations.
First, it’s important to understand how currency movements impact your revenues and profits. As the rand strengthens or weakens, it will inevitably impact your profit margin.
For example, imported goods will naturally become more expensive as the rand weakens and cheaper as it gets stronger. As basic as that sounds, it’s just one implication that a changing rand value could have on your business. Others include:
- Your imported products becoming too expensive for your customers, who might opt for cheaper local substitutes, if the rand weakens.
- A change in the value of the rand could also catch you by surprise if you’ve used credit to import from overseas suppliers.
- On the plus side, if the rand falls and you’ve already purchased stock, you could benefit from a boost in revenue. Alternatively, you could lower your prices and remain competitive – especially if competitors ordered stock after the currency dropped.
A boost for exporters
A fluctuating rand can be incredibly beneficial to exporters because South Africa forms part of the global economy. We Power the Nation, an independent survey commissioned by Sage, shows that 55% of South African businesses have exported goods in the last 12 months, while 69% have imported goods.
A drop in the rand’s value means exporters can consistently bring in revenue in stronger foreign currencies like the dollar or pound, while still paying costs like rent, utilities, and labour in rands. However, businesses shouldn’t let their standards drop in response to a weaker rand because this could hurt their competitiveness should the rand suddenly strengthen. It’s also important to account for international input costs like transport and marketing when the rand fluctuates. Your cash flow should ideally be able to accommodate 10-15% fluctuations in the value of the rand.
The impact of a volatile currency isn’t limited to just importers and exporters:
- Maintaining equipment can be particularly costly when the rand falls, especially if the equipment was brought in from overseas. The cost of shipping new parts is highly dependent on the value of the rand. Monthly subscription costs for international services, like cloud software, are also impacted by currency changes.
- A weaker rand usually means higher petrol prices and higher costs for goods and services. Bigger businesses can absorb these increases but they can be crippling for smaller companies.
- Higher fuel costs also impact consumers, who will have less disposable income and will have to cut costs. This in turn hurts small business and the economy.
- Currency volatility may also scare off foreign investors.
Steps to protect your business
Understanding the impact that a fluctuating rand has on your business lets you put contingencies in place to protect yourself. Here are some ideas:
- Currency hedging: Mitigate risks by entering contracts that let you manage the impact of changing currencies, like paying upfront for a 12-month subscription.
- Choose the right payments provider: If you accept international credit card payments, find an account provider that offers the best currency conversions and transaction fees.
- Increase exports: Take advantage of stronger international currencies by looking for opportunities to export your product, service, or skills.
- Go local: Try to find suitable local substitutes for your imported goods or services.
- Use forecasting and planning software: Your accounting software can provide insight into how changes in currency value have impacted on your profits and margins. Use these insights to plan for significant changes.
While currency fluctuations impact all businesses, it’s not always bad. There are ways to compensate for a weaker rand and ways to mitigate the risks of a drop in value.