Managing FX risk: how UK SMEs can protect profit margins and improve forecasting

In today’s truly global economy, currency fluctuations are no longer a niche concern or only affecting big businesses. They’re a core operational risk for small and medium-sized enterprises (SMEs) engaged in international transactions. Whether you’re importing raw materials, exporting finished products, or receiving overseas revenues, movements in exchange rates can significantly impact cashflow, costs and ultimately your bottom line.

In 2025, nearly half of UK firms acknowledged that volatility in the pound had triggered financial losses, and many are now increasing their hedging activities to protect margins and stabilise budgets. [1]

This article explains why effective risk management matters for SMEs, explores key hedging tools like forward contracts and options, and shows how working with an experienced FX broker can be transformative.

Foreign exchange risk arises when your business agrees to pay or receive a foreign currency at a future date. If rates move unfavourably between agreeing a price and settling the transaction, costs can spike unexpectedly – eroding profit margins and undermining annual forecasts.

This form of exposure, often called ‘transaction exposure’, can materially impact cashflow when foreign currency payments occur.

For SMEs with tight margins or irregular payment schedules, even modest currency movements can make forecasting and budgeting challenging.

Hedging allows businesses to protect themselves from adverse FX moves, enabling more stable planning and forecasting. Here are some common tools:

Forward contracts

A forward contract is a bespoke agreement to exchange a specified amount of foreign currency at a fixed rate on a set future date.

In practice, this means:

• You lock in an exchange rate today for a payment or receipt that happens months later.
• This can remove uncertainty around future costs or revenues.
• Forwards can be tailored to match your payment schedules – making them highly useful for planning and protecting margins.

 Benefits for SMEs:

• Certainty over future exchange rates enhances budgeting accuracy.
• Reduces the risk of unexpected FX losses.
• Helps maintain stable pricing and profit margins on overseas contracts.

Forward contracts are widely used in the UK precisely because they let businesses focus on core operations without worrying about day-to-day market volatility.

Yes, forward contracts are often ideal for SMEs that:

• Have predictable future FX needs (e.g., supplier invoices, export receipts).
• Need clear visibility for forecasting and budgeting.
• Want to protect operating margins from currency fluctuations.

However, they also come with trade-offs:

• You are committed to the agreed rate for the volume you have booked in that trade – even if markets move in your favour.
• Some contracts may require a deposit or expose you to margin calls if rates shift dramatically.

This is where expert guidance matters: an experienced FX broker can analyse your cashflow timing and help structure forward contracts that align with business goals. An FX broker can assess your exposure, forecast currency flows and recommend the best mix – balancing certainty, cost and potential upside.

Here are key questions to evaluate whether your current strategy is working:

• Do you understand how your business is exposed to FX risk (import costs, export revenues, currency accounts, etc.)?
• Can you forecast your FX cash flows with confidence?
• Do you consistently review the effectiveness of your hedging efforts relative to market conditions?
• Are you capturing opportunities when rates move favourably, or simply reacting when they move against you?

If you’re not systematically reviewing these areas, your FX risk management may be ad-hoc. Working with an FX broker introduces discipline and strategic insight into this assessment – helping you refine hedging programs over time.

Successful SMEs typically follow these best practices:

1. Understand your exposure

Map out all sources of FX risk – from overseas receivables to supplier payments and even pricing strategies.

2. Build forecasts with FX in mind

Include currency assumptions in your financial planning and update them regularly.

3. Use a mix of tools

Combine spot and forwards, currency accounts and potentially limit orders to hedge exposures while allowing flexibility.

4. Monitor markets, don’t chase them

Avoid speculative timing – focus on protecting business revenues rather than “guessing” FX direction.

5. Partner with experts

A good FX broker brings deep market insight, access to hedging tools and structured processes that most SMEs cannot replicate internally.

Hiring an experienced FX broker offers several distinct advantages:

• In-depth insight into market drivers affecting currency rates, such as interest rates, inflation and geopolitical risk.
• Access to a broader suite of hedging tools, including customised forwards and tailored risk management strategies.
• Reduction in transaction fees through negotiated execution and better pricing on international payments.
• Improved forecasting and risk management practices, giving finance teams clarity and confidence.

With sterling volatility impacting UK companies’ bottom lines, many SMEs are recognising that effective hedging, guided by experts, is becoming more and more imperative.

Managing foreign exchange risk isn’t just about mitigating loss, it’s about empowering your business to operate confidently. Forward contracts, consistent forecasting and a disciplined risk management strategy protects your profit margins and enhances strategic planning.

For UK SMEs working with international partners, an FX broker helps you balance cost, gain flexibility and provides certainty in an unpredictable currency market.

Whether you’re hedging your FX exposure for the first time or looking to refine a more advanced FX operation within your business, informed decisions today can safeguard your financial performance tomorrow.