Rand volatility: How it affects your business and what you can do to protect it

Fluctuations in the value of the South African rand compared to other currencies affect every business in the country, albeit to varying degrees.

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 some 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% 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 international 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 value of the rand falls, your imported products might become too pricy for customers to afford or too expensive to compete with locally sourced alternatives.

You may 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 plummets.
A sudden movement in the value of the rand could catch you by surprise if you use credit to order goods from international providers.

Boosting exporters?

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 (55%) of South African businesses say they exported goods in the last 12 months, while 69% have 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 don’t want to be uncompetitive during times of rand strength.

The rand going down in value isn’t all good news for an export business. You may have international input costs to consider - transport and logistics, components, sales and marketing costs, and more besides. Look at cash flow and profit margins to make sure they can cope with 10-15% fluctuations in the value of the rand.

It’s not just importers and exporters who are affected by the value of the rand:

  • 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 cost, while others experience it indirectly through rising costs for goods and services they buy.
  • Most companies use a mix of services and goods from the rest of the world to make their products and run their businesses. For example, most factories contain imported machinery, which means the cost of spares and parts rises with a falling rand. Others may import some components for local assembly of the final products. From cars to computers, nearly everything we buy has least some imported content.
  • 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. This can dampen the economy.
  • A volatile rand also discourages foreign and local investment, which can harm the economy.

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. Some suggestions include:

·         Currency hedging: You can manage your risk through currency hedging tools like forward cover (which, in simple terms, means entering a contract that helps you control the effects of fluctuating currencies).

·         Selecting the right payments provider: If you take international credit card payments, find the merchant account provider that provides the most advantageous currency conversions and forex transaction fees.

·         Increasing export business: Look for opportunities to export your product or service. This can be especially lucrative if you have a skill you can deliver remotely, such as IT consulting.

·         Import substitution: Seek local providers if the rand costs of a service or good you import become prohibitive.

·         Use software for forecasting and planning:  Use your accounting software to gain insight into how currency movements have affected your profits and margins in recent years.

By Viresh Harduth, Vice President: New Customer Acquisition (Start up and Small Business) at Sage Africa & Middle East

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