High-flying kiwi hurting SMEs

JOHN ANTHONY
Last updated 05:00 21/07/2014

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Many small businesses are being left exposed to currency fluctuations by failing to adopt adequate hedging policies, PwC advisers say.

It is tough going for export businesses with the New Zealand dollar recently sitting above US88c, just short of its post-float high of US88.42c in 2011. Last week it came back to about US87c because of falling milk prices and soft inflation.

Business owner Glenn Elliott has experienced first-hand what a high dollar can mean for a small or medium enterprise.

His Auckland kiwifruit juice company, Elliotts, lost a major Canadian distribution contract late last year because the New Zealand dollar was too strong.

Elliott started the business with his mother about 2 years ago.

It buys kiwifruit puree from Te Puke and pears from Hawke's Bay to make "Delicious Kiwi Reviver From New Zealand", a high-fibre, 100 per cent fruit juice.

Elliotts produces about 25,000 bottles a month, 90 per cent of which is exported.

The high New Zealand dollar had been hurting the company's bottom line for the past year, Elliott said.

"You just can't make the numbers work.

"I'm just hanging on by my bloody fingernails."

Elliott exported to China and Japan, where sales were doubling each month, but the strong growth was not translating into higher profit, he said.

"The dollar to the yen is just mental."

Elliott said he hoped an improving United States economy would strengthen the US dollar and have a flow-on effect on the New Zealand dollar.

PwC treasury advisory partner Roger Kerr said companies could mitigate a high dollar through hedging. But New Zealand SMEs lacked awareness in this area, he said.

"A lot of small exporters don't help themselves."

PwC private business partner Scott Kerse said many SMEs found hedging too complicated but banks had simplified the process.

Hedging involves buying or selling a foreign currency at an agreed exchange rate.

Generally, this exchange rate will not be the same as the spot rate at the time the contract is signed, although the difference is unlikely to be large.

For example, if a business knows a US customer will pay an invoice in 90 days' time, it could go to the bank and ask to lock in a fixed foreign exchange rate, Kerse said.

"So if the dollar keeps going up you get the rate you're locked in at rather than the dollar on the day that the US dollars show up."

Exporters with a hedging arrangement in place significantly reduced their foreign currency exposure, he said.

"In the long run they're not going to beat the fact that we've got a high dollar but they might get a bit more predictability."

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Businesses should determine how much exposure to currency fluctuation they wanted to risk.

"Do that as a conscious policy choice."

Kerse said businesses should talk to a banking adviser or a professional about what hedging policy would suit best.

"It's just managing another business risk."

- Stuff

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