Navigating the impact of rising exchange rates on Ghanaian SMEs
Ghana's economic growth and development are heavily reliant on small and medium-sized businesses (SMEs).
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However, the recent fluctuations in the cedi's exchange rate versus major international currencies have provided a substantial challenge to the country's SMEs.
These swings have made it challenging for SMEs to effectively plan and estimate their financials.
The high exchange rate can have an impact on import costs, pricing tactics, and overall profitability for enterprises.
The cedi's fall against the dollar continued, reaching GH¢14.18 on the retail market. The local cedi has already lost 13.45% against the US dollar, making it one of the African continent's worst-performing currencies in 2024.
The falling cedi may raise the cost of importing raw materials and finished goods, resulting in greater manufacturing costs and lower profit margins for firms. In this essay, I've highlighted some ways that SMEs can use to deal with this difficult circumstance.
Diversify revenue streams
Small and medium-sized businesses (SMEs) should diversify their revenue streams to lessen their reliance on currency volatility and alleviate the effects of high exchange rates.
One practical example is entering new markets using several currencies, so spreading the risk over multiple currencies. Another approach is to provide items or services that are less sensitive to currency swings, such as digital products or services with fixed prices.
In addition, SMEs can use hedging measures like forward contracts or currency options to protect themselves from adverse exchange rate swings.
Manage currency risks
SMEs in Ghana might use forward contracts as a hedge against currency risks brought on by high exchange rates.
Using forward contracts, companies can fix the exchange rate for the future and reduce the negative effects of currency fluctuations on their earnings.
To hedge against potential losses in the event that the Ghanaian cedi weakens vs the dollar, a small and medium-sized enterprise (SME) operating in Ghana may opt to purchase US dollars at a predetermined exchange rate through a forward contract.
In order to lessen their reliance on a single currency, diversify their currency exposure, and lessen the impact of exchange rate swings, SMEs should also think about keeping a variety of currencies in their reserves.
Increased efficiency in operations
Small and medium-sized businesses (SMEs) can increase their operational efficiency to mitigate the impact of high exchange rates on profit margins by diversifying their supplier base.
This allows them to negotiate better terms and prices, lowering the impact of high exchange rates on their costs.
To avoid currency concerns, a manufacturer can purchase raw materials from several vendors in different countries. SMEs can discover areas where expenses can be cut while maintaining quality.
This can assist them mitigate the impact of high exchange rates on their profit margins. A retailer can negotiate better terms with logistics providers to save shipping expenses.
Negotiate better terms with suppliers
Small and medium-sized businesses (SMEs) in Ghana can negotiate better terms with their suppliers to reduce the impact of high currency rates.
Negotiating extended payment terms with suppliers, for example, gives you more time to pay invoices in local currency and may reduce the impact of currency swings.
Another technique is to discuss hedging alternatives with financial institutions in order to lock in currency rates for future transactions, which will provide more cost stability.
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Furthermore, SMEs might consider broadening their supplier base to include local suppliers or those from countries with more stable currencies to lessen reliance on suppliers who are influenced by currency changes.
By actively engaging in discussions and exploring new tactics, SMEs can better manage the impact of high exchange rates on their businesses.
Monitor exchange rate trends
Small and medium-sized enterprises (SMEs) can closely monitor exchange rate trends and stay up to date on economic developments that may affect the value of the cedi by visiting financial news websites on a regular basis, subscribing to economic newsletters, and following relevant social media profiles and blogs.
In addition, SMEs can attend industry events and conferences to network with professionals and learn about market trends.
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It is also recommended that SMEs work with financial experts or consultants who can help them manage currency risks and adopt hedging methods. By being educated and proactive, SMEs may better navigate exchange rate swings and safeguard their businesses from potential financial losses.
Conclusion
Ghana's SMEs face a huge issue when the cedi's exchange rate increases.
However, by applying these six successful tactics, businesses may navigate this difficult environment while maintaining profitability.
SMEs can mitigate the impact of high exchange rates by diversifying revenue streams, hedging currency risks, improving operational efficiency, negotiating better terms with suppliers, and monitoring exchange rate trends.
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The writer is a Lecturer/SME Industry Coach, Coordinator (MBA Impact Entrepreneurship and Innovation), University of Professional Studies Accra.
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