Home topics small-business-resources growth-import-export Advice Cashflow Growth | Import | Export Advice How hedging can help you do better business Paul Kammel October 23, 2012 Many months of economic turmoil for the global economy has led to instability within the market, which particularly affects cross-border business. While larger businesses are often set up to deal with this volatilitymore effectively, a process called hedging provides an opportunity for SMEs to do the same and maximise profits and revenue, minimise costs, as well as keep themselves competitive in their market place. It also plays a vital role in managing a company’s cashflow. Hedging is taking action to minimise the financial impact for international payments and/or receipts from changes in foreign exchange rates. So, for example, you run a clothing business in Australia and you buy materials from a supplier in China, the supplier invoices you in US Dollars but you pay in Australian Dollars. The payment terms for the invoice are 90 days. If the exchange rate changes between the two currencies in that 90 day period, the price you pay could actually work out to be more expensive than you had planned for. This means your business has a foreign currency exposure to the Australian Dollar/US Dollar exchange rate over that three month period. In simple terms, whatever changes happen between the currencies will impact the price you pay for the materials. If you’re importing the product to sell on to another business in Australia, you could actually make a loss