Friday, July 18, 2014
Dancing to the Loonie's Tune
Devalued dollar the new norm for small business
Released by Jason Brown, FWCU/Mint.ca image
ith now more than six months of a lower Canadian dollar in the marketplace, it appears a weaker loonie is here to stay for some time, even despite its recent rally. Financial pundits have taken the Bank of Canada’s latest hold on the overnight lending rate as a commitment to keep the dollar from soaring to the levels of the past several years. Small business owners must now come to terms with the new reality of a weaker currency.
“Fluctuation in the Canadian dollar affects industries in different ways, but businesses that rely on goods or services from the U.S. will especially be feeling a squeeze now because of reduced buying power,” says Robert Deol, a commercial account manager at Envision Financial. “Businesses in sectors tied closely to the price of the loonie should have the dollar’s rise or fall identified as a key external threat in their business strategy.”
With a lower Canadian dollar, many businesses also begin to see their transportation costs rise. Those with a solid business strategy begin to lean on their contingency plans, such as finding alternative suppliers located in Canada or closer to the U.S. border, as a short term tactic to help reduce transport costs. For many businesses, changing prices inevitably becomes a way of dealing with a weaker currency.
“Increasing prices to offset expenses is a bit of a Catch-22,” Deol says. “Businesses don’t necessarily want to pass additional costs on to their customers, but pricing based on economic conditions is a key component of a well-put-together business strategy. Altering pricing to build in a fluctuation spread is one adjustment that can be used over the short term.”
With several economists forecasting the loonie to sit lower than the U.S. dollar for the foreseeable future, businesses should also think about long-term adjustments.
“Businesses can use a U.S. dollar account to try and reduce loss due to exchange rate,” says Deol. “Revenue in U.S. dollars can go into the account and be converted when the exchange rate is more preferable.”
Using a currency forecast system such as a forward currency contract can be used as a tool to reduce foreign exchange risk.
“A business owner might consider forward contracts for purchasing standard supplies,” Deol says. “If it’s known there will be a continual need for a certain good in the future, a forward contract can lock in the price of that good at a time when the Canadian dollar—and buying power—is stronger, reducing loss to exchange rate.”
Perhaps as important as making use of banking products and services is undertaking some financial analysis.
“Forecasting cash inflow and outflow can help business owners really see exchange rate loss or gain,” Deol says. “It’s difficult to do but it gives a better idea of exchange rate impacts on their business. And considering the shifting of other economic conditions that impact the loonie, such as inflation, it would be time well spent.”
Business impacted by the currency fluctuations shouldn’t underestimate the effect it could have on their business. Deol suggests that business owners sit down with a knowledgeable financial professional to discuss ways to mitigate the risk and ensure their business is strong for years to come.
About Envision Financial
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