Archives For SMPs

P Gelis

By Philippe Gelis, CEO at Kantox Peer FX

Earlier this year, the Edinburgh Group published evidence on the international activities of SMEs and the advice they get from small and medium sized accountancy practices (SMPs). More than seven out of ten SMPs have internationalised SME clients and 17% depend on these for more than 25% of their fee income.

This may sound like a lot but actually the figures should be much higher. SMPs need to look after ambitious SMEs and help them to grow into bigger business – it’s in the interest of both the accountancy firm and its clients. SMEs with international aspirations tend to deliver better performance and higher growth rates and hence make lucrative and prestigious clients for SMPs. Sooner or later, especially as they create deeper ties with their new markets, these international SME will build up substantial exposures to foreign currencies that could threaten the business’ profitability.

We know this from earlier research Kantox carried out with ACCA – internationalised SMEs and mid-market companies are typically exposed at a level of around 19% of revenue – of which possibly less than half is hedged in any way and even less is managed in an active manner. Frustrated by complexity and cost, and with only limited resources and access to relevant skills, some SMEs may be resorting to overly expensive hedging methods or taking their chances with the markets.

Even domestically-focused SMEs are not immune to foreign exchange risks. In regions heavily exposed to foreign banking sectors, like South East Asia in the 1990s and much of Central and Eastern Europe pre-crisis, businesses have been known to borrow in foreign currencies, thus taking on risks they were often ill-prepared for. Having access to good advice can, for such firms, be a matter of not just profit and loss, but life and death.

Yet ACCA and Kantox’s careful review of the Edinburgh Group data shows that SMPs aren’t always up to speed when it comes to SME clients’ exposures. Less than a quarter of SMPs with clients exposed to FX risk are involved in managing this. As a rule, in countries where volatile exchange rates make frequent headlines, practitioners are more alert to the potential problems than their clients; the opposite tends to be true in countries where SMEs deal in stronger currencies.

Resource is of course an issue for SMPs that do not have access to extensive professional networks or overseas partners, and thus have to solely rely on in-house staff to help internationalised small businesses. Anyone can buy and sell currency, but managing FX risk is a specialist skillset and not all practices can justify the up-front investment it requires. Typically, SMPs get drawn into FX risk management by one or two critically exposed clients, or when a critical mass of clients turns out to have exposures in need of monitoring. The more proactive ones make a point of building their brand around advising international businesses, and realise that FX is a natural part of the portfolio of such an adviser.

While FX hedging will always be highly dependent on context, including both company-specific factors and market dynamics, six simple rules can help business owners, and the practitioners who advise them, to approach the task correctly.

  1. Define an FX hedging policy that is based on your risk appetite. If you want to hedge successfully, everyone in your company – board of directors, CEO, CFO, treasurer(s), accountant(s), etc – needs to know and share common targets and rules. Personally check that each board member has clearly understood the potential risks of the hedging policy previously defined. In some cases, board members prefer not to hedge the FX exposure to minimise costs and benefit from potentially favourable currency movements. Calculate worst case scenarios and present the results to them.
  2. Identify your FX position and decide, on the basis of the hedging policy previously defined, whether they have to be hedged. It may seem obvious but to hedge successfully you need to know, at every moment, your exact FX exposure and its potential impact on your company’s profitability and competitiveness.
  3. Don’t try to forecast currency movements or, at least, do not base your hedging decisions on currency movement forecasts alone. Do not forget that no one, including leading banks, is able to predict currency movements consistently, let alone forecast potential high-impact disasters on FX markets (think of Bear Stearns, Lehman Brothers, loss of the US AAA credit rating, Greece’s sovereign debt crisis).
  4. Never speculate with your corporate cashflows. Do not forget that hedging FX exposure is not the core business of your company. This means that in managing corporate FX risk you should aim to make neither profit nor loss but rather maintain a zero balance. Do not forget that not hedging FX risk is similar to speculating.
  5. Buy only what you understand. Make sure you fully understand the financial products you use to hedge corporate FX risk (forward contracts, futures, options, exotics, etc). Buying derivatives is quite easy but understanding how they are built and the hidden related costs and risks is much more complex.
  6. Avoid ad hoc data manipulations. It is so easy to add or forget a ‘0’ when filling in data into a spreadsheet. Implement a treasury-management system. It may seem expensive, but only until your first big data mistake.


By Mark Gold, chairman of ACCA’s Global Forum for SMEs

I gave a keynote speech at the SME/SMP forum held by ACCA Uganda, in Kampala, recently.

As the chair of ACCA’s global forum for SMEs, I know that small businesses are critical about global growth because they feel there are many obstacles in their paths, such as lack of finances; absence of trusted advice in overseas markets; and scepticism of the unknown.

My speech was about these key issues and how this business sector is much more likely to use an accountant, because the advice they get from their accountants is the most trustworthy of sources.

ACCA has launched two campaigns in the past year to try and allay some of these concerns – public value and the complete finance professional. Both aim to show the wider public, including businesses, just how dependable the accountancy profession, specifically ACCA qualified accountants, is.

Due to the continuing global economic crisis, it has been hard for small businesses to find the funds to aid global growth during its time of need.

Banks are also being cautious with their money and so are not lending as much to SMEs, which fuels financial hardship for small businesses.

Accountants need to be on hand to advise those who seek it, before any “crisis” arises, not just when a problem has occurred. Problems need to be stopped in their paths before they develop into bigger problems.

Charles Ocici, executive director of Enterprise Uganda, came up with solutions for accountants and SMEs alike:

  • Cultivate the culture of taking professional advice FIRST, not only when there is a problem, or when they need a loan!
  • Offer solutions in a phased manner – if you gave a baby ten injections all in the same spot on the same day you kill it!
  • Use a language easily understood by your client
  • Take time to get into the guarded space of the entrepreneur to secure their trust.
  • Keep professional distance to be respected
  • Systems run the business – but people run the systems, so check how professional are your OWN internal and external team.
  • Price is not the main reason customers leave
  • An increase of 2% of sales equals a drop of 10% in costs.

We also had a panel discussion about why small business will not use small and medium practices (SMPs)

  • Taxes – they don’t want to register and risk having to back and regulate and pay for previous years.
  • Costs
  • Non-disclosure – cutting corners and don’t want transparency
  • So many fake accountants

There is concern over finding legitimate accountants, but the best way to check their credentials is to search for them on the internet and ensure they are ACCA approved, or contact the ACCA national office in the country you live in and they’ll be able to help you.

SMEs must include in their investment strategies good financial advice. It is key to investments and without it, decisions will not be made properly without the necessary guidance.

There should also be government support for SMEs to help them become competitive.

There is a need to educate small businesses that accountants are needed throughout their business lives, not just to get things going or to resolve any issues that may occur along the way.

SMEs are at the heart of our global economy, they have helped greatly in restarting the economy where national, and even global organisations, couldn’t.

Accountants and small businesses need to work together to keep things going. They are vital assets to the economy.