5 critical currency risk management mistakes SMEs must avoid

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Picture this: You've tracked your costs and kept them low. Cash flow from operations is healthy. Your actuals are tracking your budget. And then an exchange rate fluctuation that is fully outside your control pushes your margins into the red.


This nightmarish scenario is a surprisingly common one for many SME CFOs. The worst part of this situation is that these losses are purely financial, not operations-based. 


As a result, they're your responsibility as a CFO. But there's good news. 


You can mitigate the risk from currency rate fluctuations by avoiding these five mistakes we often see companies making:


  • Underestimating FX exchange rate impacts
  • Going directional
  • A lack of clear objectives
  • Giving into FOMO
  • The “set it and forget it” approach


Let's look at these one by one.


Currency risk management mistake #1- Underestimating FX exchange rate impacts


Exchange rates do not move much compared to stocks and other mainstream financial assets. The typical G7 currency pair moves in 0.01% increments, a seemingly miniscule amount.


However, these moves add up over time.


For example, let's assume you receive revenues in USD and your base currency is EUR. 


  • Revenue from customer - USD 5,000
  • USD to EUR exchange rate at sale - 1.0000
  • Payment credit cycle - Net 30
  • USD to EUR exchange rate upon payment - 1.0500
  • Revenue received upon payment - EUR 4,975


In this example, a seemingly small exchange rate move of 50 basis points creates a EUR 25 loss. Over 1,000 transactions, you'll lose EUR 25,000—a common transaction volume for a EUR 5M business.


In situations like these, you never know how much cash you'll bring onto your books until the day you get paid. As a result, not only you cannot confidently project your performance or present numbers with any accuracy but you’re also putting your bottom line at risk.


“Over the last decade, we’ve seen so many huge market moving events that were unforeseen and unpredicted: Brexit, COVID, the war in Ukraine to name a few. They've had a huge impact on FX markets.” says James Gunns, FX expert at iBanFirst. “If you've got an exposure to FX at any level, it should be considered a serious risk that needs to be addressed one way or another. it's no longer just a case of it's a fixed amount of risk, or it's a fixed amount of loss that you could potentially be facing. It is increasing on a regular basis.", he adds.


The bottom line: Each time you commit to receiving future payments or making payments in a foreign currency, you expose yourself to fluctuating exchange rates that can make your cash flows unpredictable. Work with a currency risk management expert to understand your exposure and mitigate the effect of currency markets ups and downs.


Currency risk management mistake #2 - Going directional


Every smart SME CFO knows trying to boost profits by speculating in currency exchange rate moves is a risky move. However, we often see companies inadvertently assume a directional position in the market without realising it.


Most SME CFOs believe mitigating FX risk is complex and shy away from effective FX risk management products like forwards. Instead, they’ll simply convert their funds the day they receive foreign currency. 


They focus on the exchange rate on that day and the cost of execution, failing to realise they're speculating on the exchange rate's direction.


Here's what we mean. From our previous example, you billed your customer USD 5,000 when the EUR and USD were equal (at parity.) But your customer pays you after 30 days, at which time the exchange rate shifts to 1.0050. 


You execute a Spot contract and receive EUR 4,975 instead of EUR 5,000. But what if you had executed a Forward contract the day you issued the invoice? 


Here's how the numbers look:





Billed amount (EUR)



EUR/USD rate



Amount received (EUR)



Cost of execution (EUR)



Total expense (currency loss + cost of execution)




Not only does the forward save you money, but it most importantly buys you certainty and clarity. You know how much you'll receive the day you issue your invoice.


With a spot transaction, you're effectively hoping for a favourable exchange rate the day you exchange currencies. 


Sounds a lot like directional speculation, doesn't it?


“As a CFO, you're not there to beat the market. You're there to keep your company's cash flow and profits safe. It's better to take risks off the table upfront instead of just hoping things will go your way. Hoping for the best isn't really a plan”, says James.

(If you still think a Forward contract doesn't make sense for you, consider this: They helped Mcdonalds launch the Chicken McNugget.)


The bottom line: Don’t play currency roulette with your company’s hard-earned cash. Looking into FX risk management solutions is the wiser move.


Currency risk management mistake #3 - A lack of clear objectives


You can mitigate many problems in your FX risk management program with a simple fix—have clear objectives.


But how do you figure out your objectives? The first step is to check whether you even need a complicated FX risk management program. Next, ask yourself which business risks you're trying to mitigate with your risk management program.


Lastly, define the metrics you will use to evaluate how effective your strategy is. Here are a few questions that will help you get started:


  • Where are you exposed to currency risk? Which types of risk are you trying to mitigate with your FX strategy?
    • Transaction risk - Paying suppliers, getting paid in foreign currencies, etc.
    • Translation risk - Reducing the impact of foreign-owned assets or liabilities.
    • Operational risk - Smoothing cash flow and creating predictable outcomes.
  • What's your estimated yearly FX volume looking like? How ahead can you forecast these volumes? And how much of your total revenues do they make up?
  • Is there a specific budget rate you’re aiming to achieve?
  • How much risk are you willing to tolerate?
  • What's more important to you? Protecting your margins strictly or allowing yourself enough wiggle room to capitalise on new opportunities?
  • How much support do you need to execute your risk management strategy?


The answers to these questions will give you the building blocks to shape the kind of FX risk program your company needs. Plus, you'll have a clearer sense of which tools and partners might be a good fit.


The bottom line: Understand your objectives and figure out your FX needs based on them.


Currency risk management mistake #4 - Giving into FOMO


FX Forwards offer a solid solution for handling your exchange rate risks and restoring stability to your currency cash flows. However, if you're not entirely clear about their purpose and mechanics, you might start questioning whether they're suitable for you and even experience the fear of missing out (FOMO.)


Let's revisit our earlier example to illustrate this point. Imagine you've invoiced your customer EUR 5,000 with the EUR/USD exchange rate at parity (1.0000). You decide to lock in a Forward contract at 1.0010, so you'll receive EUR 4,995. Sure, you're technically locking in a EUR 5 loss, but it's to avoid even bigger losses down the road.


Now, picture this: Over the next 30 days, the EUR/USD exchange rate drops to 0.9995. If you hadn't locked in that Forward, you could've pocketed EUR 5 more, receiving EUR 5,005 instead of EUR 4,995.


So, you might start thinking, "Did I miss out? Should I have taken a gamble on where the EUR/USD was headed?" These thoughts are pretty common and show a sneaky speculative mindset. Sure, exchange rates can work in your favor, but they can also work against you.


As James puts it:

“Here's the key thing to grasp: a forward is fundamentally a defensive tool designed to shield you from adverse market movements. It gives you that solid ground to stand on, that certainty, that clarity you need. The goal isn't to speculate or win.”



The bottom line: Resist FOMO and treat currency Forwards and FX risk mitigation plans as insurance policies. When dealing with FX, as a smart business leader, your main focus is on avoiding losses, not chasing gains.


Currency risk management mistake #5 - The “set it and forget it” approach


Recent events have underscored a crucial lesson: planning for the future isn’t necessarily a one-and-done deal.


FX risk management strategies are built upon assumptions about various economic factors, including interest rates and currency pair activity. As with any financial market, underlying conditions shift - and your strategy needs to shift with them.


Also, what if you expand into a new market, launch a new product or switch up your suppliers?

Anytime your business goals or operating environment change, it's a good idea to take a step back and reassess.

“Work with your FX specialist to keep tabs on your risk exposure.

Check how your actual exchange rates stack up against your budget rate regularly, and make sure your strategy is still doing its job.

If not, tweak as needed.”, says James.

And remember: when you’re evaluating how well your FX risk management program is working, it’s not about chasing big wins. It's about keeping your company financially healthy by softening the blows of currency fluctuations. Prioritise stability over short-term gains.


The bottom line: Creating a strategy is just the beginning. Partner with a trusted FX partner to monitor its performance and uncover opportunities to increase efficiencies.


The right way to manage FX risk


FX risk management can get complex in a hurry. What's the best choice: stick with Spot, opt for Forwards, or maybe try a combination of both? What should your budget rate look like? How long should your hedging window be? How much of your projected cash flows should you hedge?


Working with a trusted and experienced FX risk management specialist will reduce these headaches and keep you focused on the most important aspects of your business.


Speak with one of our experts to understand how iBanFirst can help you reduce cross-border currency risk.




What are the most common FX risk management mistakes SMEs make?

SMEs usually make the following FX risk management mistakes:


  • Underestimating FX exchange rate impacts
  • Going directional
  • A lack of clear objectives
  • Giving into FOMO
  • Not monitoring their risk mitigation plans 


How can SMEs define their currency risk management program objectives?

SMEs can begin defining their FX risk management objectives by asking the following questions:


  • How are they exposed to currency risk? 
    • Transaction risk - Paying suppliers, getting paid in foreign currencies, etc.
    • Translation risk - Reducing the impact of foreign-owned assets or liabilities.
    • Operational risk - Smoothing cash flow and creating predictable outcomes.
  • What's their estimated yearly FX volume? How ahead can they forecast these volumes? And what percentage of their overall revenues do they account for?
  • Is there a specific budget rate they’re aiming to achieve?
  • How much risk are they willing to tolerate?
  • How much support do they need to execute their FX risk management strategy?
  • What's more important to them? Protecting their margins strictly or allowing themselves enough flexibility to capitalise on new opportunities?