11.26.2012

Faltering Currencies and Your Business

Across the globe, there have been a multitude of problems tied to exchange rate difficulties. Much attention has been focused on the macroeconomic effects of these fluctuations, but for businesses the consequences are often overlooked.

For businesses in many developing countries like Ghana, the importation of raw materials and finished goods are the norm. Manufacturing industries in such countries are largely underdeveloped, hence those in business, (particularly retailers) are forced to depend on imports. To purchase these imports though local currencies must be converted to internationally traded currencies like the US Dollar. Over the last few months in particular, currencies like the Ghana Cedi have faced a consistent decline against currencies like the US Dollar, Pound Sterling and Euro. What have the implications been for businesses dependent on the importation of goods and raw materials to meet the needs of their clients? Rapidly rising costs and in some cases an inability to continue to do business.

A perfect example is the online accounting portal I created, Start Smart. My domain and hosting packages are through the US based company GoDaddy, and in order to renew the two I need to make payments in dollars. If Start Smart were a paid rather than a free service, I would most likely collect payments in Ghana Cedis and at a later date have to convert them to dollars to cover expenses like my domain and hosting. As the Ghana Cedi depreciates though, I would need more cedis in order to have the same dollar amount to renew my domain. Unless I choose to raise the prices that my customers pay, I’m incurring an extra cost which could potentially put me out of business.

What’s the solution? In Ghana, some businesses have resorted to pricing their goods in more stable foreign currencies like the dollar. The problem with this solution though is that it further complicates the issue of depreciation. Additionally, customers are forced to change the currency they have (in Ghana’s case this is the Ghana Cedi), into dollars in order to be able to purchase the goods that these businesses price in dollars. The result is that as the currency declines, goods become more expensive for local customers (converting their hard earned local currency into dollars) who may eventually look for substitutes or change their consumption habits all together.

Though the only real solution to the problem is the recovery of the global economy and a change to local macroeconomic policies (in the case of countries like Ghana), there are alternatives to mitigate the effects of depreciation. One such example is building exchange rates into contracts. If for example you have a contract to purchase inputs with a supplier abroad, it is possible to include in the contract a clause that binds both you and your supplier to choose a constant exchange rate for the duration of the contract period. Thus if the currency depreciates, your business is not affected.

How have currency fluctuations affected your business and how have you been able to cope with them?


Visit us on the web: www.startsmartgh.com Send us an email: startsmart.info@gmail.com

2 comments:

  1. This is very interesting. But what if you buy raw materials from the local market, for instance papers to do your printing gigs? The price of paper keeps soaring and It's becoming a headache for me sometimes. Can you please give me some tips on how to cope with a situation of this nature. I think it will be naive on my part to be waiting on a government. I've got to do something on my own.

    ReplyDelete
    Replies
    1. Great question Fiifi. One way to help I would say is to begin investigating alternative suppliers, look out for wholesalers and consider buying in bulk to help keep the cost of your supplies down. I'm not sure how you currently price your designs but perhaps you'd want to consider an approach that covers cost and your margin. For example if each sheet of paper costs 50 pesewas and ink costs an additional 10 pesewas per design, you should charge 60 pesewas plus whatever margin you believe is appropriate for your services. This will ensure that each time you sell a design, your costs are covered. Hope this helps!!!

      Delete