Foreign Exchange
SMEs are increasing internationalised and as such are exposed to more FX risk (Reuters)

Over the last decade, technological change and deregulation have led small and medium-sized accountancy practices (SMPs) around the world to reconsider their offering to small and medium sized enterprises (SMEs), diversifying away from compliance and towards higher value-added services.

The owners and managers of SMEs, however, are in no rush to part with their money. Selling higher value added services is usually a matter of targeting and developing the minority of clients that are going places - often literally.

According to figures released earlier this year by the Edinburgh Group, more than seven out of ten SMPs have internationalised SME clients and 17% depend on them for more than 25% of their fee income.

The most obvious change that comes with internationalisation is dealing in foreign currencies. With foreign currency exposure, however, comes risk, and not all SMEs are well-placed to deal with this.

Research carried out by ACCA and Kantox Peer FX in 2012 found then that internationalised SMEs and mid-market companies are typically exposed at a level of around 19% of revenue - of which possibly less than half is hedged in any way.

Even less is managed in an active manner, and SMEs that do hedge generally lack the right skills, resorting to inappropriate or overly expensive hedging methods.

Taken at face value, this lack of sophistication must be an excellent opportunity for advisers, including SMPs - but has the sector really delivered so far?

Global Divide

To answer this, ACCA and Kantox took a second look at the Edinburgh Group's data. We found that fewer than a quarter of SMPs with eligible clients gave advice on managing FX exposures.

Further evidence came from ACCA's Global Economic Conditions Survey, revealing a significant divide between the developed and developing world.

Businesses in developed countries, trading mostly in global reserve currencies such as the GBP, EUR and USD, have it easy. Practitioners there were generally less concerned about forex than their SME clients. On the other hand, many ACCA members work in emerging and frontier markets where exchange rates are much more volatile.

SMPs there tend to be very proactive - they've noted the urgent business need and are generally more alert to FX risk than their clients.

Our review of the Edinburgh Group data reinforced this distinction, but also helped explain it. SMPs can get drawn into FX transactions by just one or two clients, but it takes a critical mass of exposed clients to get them to invest in the skill-set require for managing forex risk.

The exposures involved are rarely about trading alone - it is capital flows through investment or joint ventures that are most likely to trigger the accountants' involvement.

SMPs get involved even more readily when their clients have borrow in foreign currencies - a seemingly good idea when interest rates in other countries are lower, or when inflation is on the rise at home, but with the potential to cause serious damage when the underlying flow of capital reverses.

But for every one who gets their timing right, and uses foreign currency borrowing successfully for inflation hedging or speculation, many more cripple their businesses trying. Our members in East Asia saw this happen in the early noughties, as did members in Central and Eastern Europe during the last financial crisis.

Even today, foreign-currency borrowing is not as rare as one might think. The Edinburgh Group's survey revealed that 14.5% of SMPs internationally have SME clients with debt denominated in foreign currencies, and the figure rises considerably in emerging markets.

Regardless of how they become involved, the more proactive SMPs make a point of building their brands around advising international clients, and realise that FX is part of the portfolio of such an adviser. More fortunate practitioners can draw on international professional or firm networks for assistance. But for most small practices it is a cost and distraction from the core business that they cannot justify.

Bearing that in mind, ACCA turned to Philippe Gelis, CEO of Kantox Peer FX, for some practical tips for practitioners and their clients. His advice?

"Develop a policy on FX risk that your board can understand and own - then make sure everyone involved knows about it. Monitor your exposure fully and regularly. Most importantly, don't try to forecast or beat the market, but aim for a zero balance. To do otherwise is to use your business' working capital for speculation, and speculating with money you can't afford to lose is just plain stupid."

Emmanouil Schizas is Senior Economic Analyst at the Association of Chartered Certified Accountants (ACCA).