Business Essentials: 'Can we buy from Europe without losing our profits in translation?'

A group helping businesses to recycle wants to avoid waste of a financial kind as exchange rates fluctuate

Synmet Group may be reaping the financial rewards of rapid growth, but the firm is concerned about losing chunks of its profits to currency fluctuations. Duncan Bowett, the managing director of its UK division, wants to know how to overcome the problem.

"The group designs and manages large bespoke recycling systems for our clients in the UK, but these units are manufactured and purchased in Germany and Holland," he explains. The lead times - from the point of order to completing the commission - can be up to 12 months.

"This inevitably means there can be problems with exchange rates, which can have a major impact on the final price in sterling," says Mr Bowett. "Sometimes the currency rate will move in our favour, but other times it moves against us. This doesn't matter too much when you're talking about small transactions, but as the transactions become bigger, so does the risk. Some of the units can be very large, costing up to €8m (£5.5m) or more."

The issue is made even more pressing because Synmet Group, which is a Dutch-owned company, belongs largely to venture capital and private equity investors. "Just 15 per cent of the company is owned by the people within it," says Mr Bowett. "So we are talking about shareholders' money."

The group was founded in 2001 with the purchase of two separate companies. This was followed by the purchase of another business in 2003 and a final one in 2004. "Throughout this time, we've used our own bank as a standard, but banks are not particularly competitive when it comes to exchange rates," he says. "Nor are they flexible. They give you a rate and that's the end of it."

It doesn't help that the Synmet Group started off at zero in terms of turnover. "We have expanded rapidly," says Mr Bowett. "Last year, we turned over around £4m and this year we are looking to turn over £12m. But that doesn't make it easy for the bank to consider us as a valuable customer and therefore offer us better rates."

The easiest solution would be for Synmet to fix the exchange rate at the outset of the project with a forward contract, but in that case, the group could lose out if the rate subsequently improved. "It would certainly take the element of risk out of the equation," says Mr Bowett, "but it would also make us potentially non-competitive in what we are trying to do. Is there accepted best practice in this area?"

He knows that a growing number of small companies deal in this very issue. "[But] the worry for us about dealing with such a company is security. We are not talking about a few hundred thousand pounds. It could be a single transaction of up to £5m. And while they all say they are regulated by a governing body, the risks involved would still ultimately be ours."

www.synmet.nl

WHAT THE EXPERTS SAY

Pete Ferns, Director of Business Banking, Natwest

"There are two different courses of action that Mr Bowett could take. First, he could wait until the actual date when he needs to make the payment and then call his bank to book a rate. However, here he is at the mercy of the markets, which may have moved for or against him.

"Alternatively, Mr Bowett could call his bank and book a time option forward contract. This would allow him to secure an exchange rate in advance and then have the flexibility of paying between agreed dates. For example, he could book a rate now for a period in December, and that way he would know exactly how much he would be paying. This will allow him to budget. The downside is he would be locked in and could not benefit from any favourable exchange rate movements in the intervening period. And he would be required to fulfil the contract even if the underlying business transaction is later cancelled."

Jonathan Quin, Director, Corporate Foreign Exchange, World First UK

"Mr Bowett will certainly save money by using a currency company instead of a bank. The savings will be considerable.

"Best practice among large firms is to have fixed hedging policies to mitigate against currency fluctuation risks. However, many banks will not offer smaller companies the facility to do forward contracts so they are unable to put hedging policies in place.

"World First might suggest that Synmet hedge 50 per cent at inception with a forward contract and buy the remaining 50 per cent on completion.

"As regards security, there are simple steps Mr Bowett can take. Check that the currency company is regulated and uses segregated client accounts for clients' funds, and also ask for bank references. Some companies will offer an escrow facility through an established legal firm for larger sums."

Gail Chadwick, Director of Risk Assurance Services, BDO Stoy Hayward

"Dealing with foreign suppliers can have a favourable outcome in terms of competitive pricing. However, it brings added risks that must be planned and managed for a successful result.

"The best solution is to purchase currency options. A premium will be payable to buy the option; the exact sum depends on the amount of currency involved and the time period of the option. Due to their flexibility, options are also worth buying if there's a chance the deal will not go ahead.

"Before deciding whether to use the option price or the prevailing spot currency price when closing the deal, Synmet should offset the cost of purchasing the option against any potential 'profit' from a favourable exchange rate.

"Most UK clearing banks offer currency options, so Synmet should also consult its bankers."