Since we live in an emerging market, a volatile currency will be a fact of our lives for the foreseeable future. You can't change that, but you can take steps to manage the impact of rand movements on your business.
The first step is to understand how currency movements affect your revenues and profits. You should look at how the rand's weakness or strength could dent your profits or produce a windfall. For example, if the rand strengthens 10 percent in the next few months, will you still be able to be price-competitive? If it falls, can you bear the higher input costs?
If you're an importer, for example, the products you source from global suppliers will become more expensive if the rand falls, and cheaper if it strengthens. Some of the implications of currency movements for your business might include:
If the value of the rand falls, your imported products might become too pricey for customers to afford or too expensive to compete with locally sourced alternatives.
You might get a short-term revenue boost if you paid for stock just before the rand fell in value. You could mark it up to reflect a higher rand pricing. Or you could sell it at the old price to be more competitive with suppliers who ordered stock after the value of the rand plummeted.
A sudden movement in the value of the rand could catch you by surprise if you use credit to order goods from international providers.
The exchange rate matters because South Africa is part of a global economy. We Power the Nation - an independent survey commissioned by Sage - shows that just over half (55percent) of South African businesses say they exported goods in the past 12 months, while 69percent imported goods.
A fall in the value of the rand can enhance an exporter’s global competitiveness because it could earn consistent revenues in stronger currencies, such as the US dollar or the euro while paying costs in rand for rent, labour and utilities. Yet it’s important not to use rand weakness as a crutch to compensate for poor quality and low productivity. You also don’t want to be uncompetitive.
A weak rand usually means that we all pay more for fuel. Some small businesses feel the result directly in the form of higher transportation costs, while others experience it indirectly through rising costs for goods and services they buy.
When consumers are paying more for fuel and other essentials affected by the value of the rand, they have less discretionary income to spend on other goods.
A volatile rand also discourages foreign and local investment.
Hedging against the rand
Once you understand how the value of the rand affects your revenues, margins and customers, you can take steps to cushion your business against the volatility
You can manage your risk, for example, through currency hedging to help control the effects of fluctuating currencies.
Viresh Harduth is vice-president: new customer acquisition (start-up and small business) at Sage Africa & Middle East.