If you run a small business, you’ll know that it’s essential to both increase revenue and have appropriate risk management strategies in place. Both approaches are essential for taking your small business to the next level – and from preventing financial disaster from striking.
There are plenty of ways to achieve these goals – and foreign exchange trading is not often at the top of the list. Yet it’s a prudent way to manage your small business’ money, and a method of helping it take steps to the next level. Here’s how.
As a hedging device
One of the main ways in which foreign exchange trading can help take your small business to the next level is through hedging. Hedging refers to the practice of covering all bases in a financial sense. If your small business operates around the world, it’s likely that you’re exposed to significant exchange rate risk. You may, for example, make profit in a country in which the exchange rate with the dollar is not in your favor.
Moving the money back into dollars could reduce your profits. You may be able to leave them in a foreign bank account until such a time that you can convert it all back into the dollar – but what if that isn’t possible? If you’ve hedged even a hundred dollars or two, you’ve made a foreign exchange trade that takes the opposite position to the one you wanted from your actual business transaction. This way, you’re able to either turn a profit – or at least minimize your losses – no matter what happens.
For a second income stream
But there are also plenty of other reasons why people practice foreign exchange trading as small business leaders. One of these is to create a diversified investment stream. Say your small business operates as a cafe: that’s all well and good, until there is some sort of downturn which affects footfall – like the coronavirus pandemic, which saw many tiny hospitality operations go out of business because they had lost their regular stream of customers.
If your small business doesn’t have a back-up plan for a second income stream, this sort of unexpected challenge ought to be on your risk register. And it’s wise to think about what you can do to create a small stream of income that doesn’t require you to be physically present in a certain location. You’d need to think about whether you’re suited to forex trading, of course – and whether you can afford to spend or potentially lose some of your company’s cash. But the advantages of it as a back-up plan are numerous: it only requires a computer and some start-up capital, for example.
And if you’re feeling under-informed as you move away from your small business specialist area and into finance, you can get answers to key questions like “what is open position in trading” by heading to a respected site like ForexTraders.
Avoid cash investments?
As a business, it’s likely that you hold at least one bank account which is full of cash. This account, or these accounts, might be there to ensure that you pay your suppliers and your employees on time, and it is an important part of your operations. It’s important, though, to remember that this account is also an asset as well as something functional. The money in it could earn you cash as well as storing it, although the current challenge in that regard is that the rate of return is too low in an environment of chronically low interest rates.
That’s why many small businesses decide to consider investing their cash, however small. There are, of course, positives and negatives to this. One of the main advantages is that it can provide a rate of return higher than what is possible at the bank. The disadvantage is that the value of an investment can go down as well as up.
The same is true for cash thanks to inflation, although the extremes of fluctuation are less broad compared to the foreign exchange trading sector. In short, it’s up to the individual small business to decide what to do with its cash, and when the requirement for a better rate of return is greater than the requirement for predictability.
Overall, foreign exchange trading can have big benefits for small businesses – although exactly which benefits the small business is likely to derive depends more on their individual circumstances. For firms that regularly operate in foreign countries, hedging is likely to be an important consideration. For those who want to improve their revenue, forex can also help.