Expanding your business internationally is a powerful catalyst for growth, opening up access to new markets, boosting your revenue potential and unlocking opportunities for cost reductions and economies of scale. But an often-overlooked cost of expanding into new territories is the potential currency exchange risk that comes with it, and the impact that could have on your margins.
In this guide, we’ll tell you all about the hidden FX traps that can creep in through everyday operations and cut away at your margins, so you can identify your exposure, manage the risks and steer your business towards growth and success, while keeping your margins intact.
Let’s take a look at some of the FX challenges for international businesses. Say you’re a UK business looking to tap into the huge US market. You’ve done your homework, you’ve crunched the numbers, and you know you’ve got a profitable opportunity. A stronger pound might seem like a win as it could reduce your costs if you’re converting GBP to USD to fund expansion. But what happens when your US revenues start coming in and you want to bring those profits back to the UK? Suddenly, each dollar buys you fewer pounds, potentially eating into your margins.
Thanks to currency exchange risk, your projected profits can be swept away in the blink of an eye, and that’s not a gamble worth taking. This is where FX risk management comes in. By assessing and mitigating your currency risks in advance, you can protect your profits from the peaks and troughs of the forex market, while improving your forecasting, budgeting and cash flow stability.
Currency exchange risk hides in day-to-day operations
Like so many things in business, the devil is in the details, because FX risk doesn’t just appear during payment processing or one-off transactions. Currency exchange risk can be hidden in the day-to-day operations that underpin your expansion plans, including, but not limited to:
- Quoting international customers a price in their local currency
- Forecasting revenue from new overseas markets
- Negotiating contracts priced in non-domestic currencies
- Hiring and operating costs of overseas teams
- Pricing decisions for overseas markets are based on assumed exchange rates.
Why currency risk matters: small shifts, big impact on margins
Small fluctuations in exchange rates can have a huge impact on the margins of any international business. Take exports, for example. If you’re a UK business selling into the US, a weaker pound means your goods become cheaper in dollar terms, potentially boosting demand. But if the pound strengthens, your products become more expensive for US buyers. That could squeeze your margins, force you to lower prices, or make it harder to compete in the market.*
Depending on the size and structure of your business, fluctuating exchange rates can disrupt your supply chain, particularly when you’re sourcing materials, paying overseas suppliers, or managing logistics in different currencies. A small shift in FX rates might not seem like much in isolation, but when applied across multiple invoices, shipping contracts, and production inputs, the added cost can quickly add up to a big problem for your bottom line.
*This scenario is hypothetical and provided for illustrative purposes only. Currency exchange rates are subject to market fluctuations, and actual outcomes may differ. This does not constitute financial advice or a forecast of future performance.
The way forward: Diagnose your FX risk before you defend
With currency exchange risk embedded in so many key areas of growth, managing currency risk is key to protecting your profitability, but accurate forecasting is almost impossible without a full picture of the exchange rate risk. That’s why we always recommend a diagnostic approach that starts with mapping your full FX exposure across your business. At Lumon, our first step is always to help you identify and measure your currency exposure. This will give your decision-makers a clear view of where all the risks are. Once you know this, you can begin to develop mitigation strategies to protect yourself from currency fluctuations.
Tip: If your business doesn’t have a dedicated treasury team, working with an FX specialist could help you explore how different currency scenarios might affect your margins. They can also introduce tools that may help manage risk.
How FX hedging protects your margins during international trade
Hedging in international trade can be a good option to manage exchange rate risk. Most large companies that operate internationally use hedging strategies to protect themselves against currency exchange risk. SMEs often don’t, either because it sounds too complicated or because they don’t have the in-house expertise.
Hedging strategies are actually just as relevant for SMEs as for multinationals when it comes to managing the risks of fluctuating exchange rates. Tools like forward contracts, options, or regular transactions at agreed rates may help reduce uncertainty and support more stable profit margins. However, these strategies also carry risks and may not be suitable for every business.
At Lumon, we would always tailor a hedging strategy to suit your specific needs. Some of the tools we can use to build your tailored hedging strategy include:
Forward contracts
Forward contracts allow you to buy a set amount of currency at today’s rate and use it months later, even if the rate has changed. For example, this allows you to forecast cash flow as you would know what your dollars will cost you in pounds. This can help with cash flow planning, as it gives you more certainty over what your foreign currency costs will be. However, it also means you won’t benefit if the market moves in your favour.
Options contracts
FX Options can offer flexible ways to manage currency risk while allowing you to benefit from favourable market movements. The product set is vast and can be a flexible way of managing currency risk for a growing business, but they are complex, high-risk financial instruments and may not be suitable for all businesses.
*Options are high-risk investment products that involve significant risk of loss and are not suitable for everyone. This means you might incur benefits but also costs while using investment products. If you do not fully understand the features, outcomes and risks associated with foreign exchange options, then you should not use them
Market orders
If your business makes payments abroad, a market order (or limit order) allows you to place an order for currency in advance that will only be triggered when your desired exchange rate is met. This is a handy method of hedging in international trade that avoids the labour-intensive task of monitoring the market manually until the best rate appears.
You don’t need a treasury team to manage FX risk effectively
It’s easy to assume that FX risk management is only for large corporates with in-house treasury teams. But today, SMEs have access to tools and support that make it easier than ever to build effective, tailored strategies. A specialist partner, such as Lumon, can help you navigate the FX challenges for international businesses, plan for various scenarios and build tailored, scalable FX strategies based on your unique exposure and growth plans.
The first step is recognising that FX exposure can have a material impact on your business. From there, a specialist partner can help you take a step back, assess your risks holistically, and develop a flexible, scalable FX strategy that fits your business today and evolves with it as you grow.
Tip: You don’t have to figure it all out alone. Many businesses benefit from expert support to build a hedging strategy that suits their size and risk appetite. These strategies carry risks and may not be suitable for all businesses
From risk to resilience: a currency plan that grows with you
Expanding into international markets can be a powerful driver of growth, but it also introduces currency risk that’s often underestimated. Even small exchange rate movements can erode your margins, turning an opportunity into a threat to your bottom line.
The right partner could help you take a strategic view, giving you the tools and insight to manage that risk from day one. With a tailored, scalable approach to FX planning, you’ll gain more certainty over costs, more control over outcomes, and more confidence as you scale.
This article is for general information purposes only and does not constitute financial, investment, or risk management advice. While we aim to present accurate and up-to-date information, exchange rate movements are complex and inherently unpredictable. Strategies or products mentioned, may not be suitable for all businesses.
Lumon Pay Ltd (LPL) is a company registered in England with its registered address at 20 Farringdon Road, London, England, EC1M3HE. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN 902022). LPL is authorised as an EMI pursuant to the Electronic Money Regulations 2011.
Lumon Risk Management Ltd (“LRM”), trading as Lumon, is a company registered in England with registered number 06333730 and registered address at 40 Holborn Viaduct, London, England, EC1N 2PB. LRM is authorised by the Financial Conduct Authority as an Authorised Payment Institution (FRN: 567835) for the provision of payment services. LRM is also authorised and regulated by the Financial Conduct Authority as an investment firm (FRN: 671108).
Lumon FX Europe, trading as Lumon, is regulated by the Central Bank of Ireland.
