1. Introduction
Explanation and definition of SME´s
In India, Micro, Small and Medium Enterprises (MSMEs), contribution to GDP exceeds 17% and over 40% to industrial production. MSMEs’ share of total exports is 40% and a large share of additional exports indirectly, through third parties, trading houses, etc. Traditionally, export sectors in which MSMEs operate in India have been Textiles and Garments, Leather products, Gems and jewelry and Handicrafts. MSMEs’ also have a large share of market in industrial goods segments like Electricals, Electronics, machine parts, plastics, etc.
Risks for SME´s:
1. Financial risk
With increasing Labour costs, fuel costs and an intense competition in a global economy, the companies have to deal with
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An SME must ensure that a diligent credit assessment is carried out to find out the ability to make payments before giving credit to a potential customer.
SMEs can also use the credit ratings and business information that is readily available from sources such as the Credit Bureau. Even after a potential business partner has been assessed as credit worthy, SMEs should continue the diligence to either impose or monitor credit limits to limit and proactively manage their credit exposure.
In this project, we deal with ways in which currency exchange risk can be mitigated by SMEs in India.
2. Currency exchange risk:
Exchange rate risk is faced by businesses and investors due to change in exchange rates. An exporter is likely to experience shrinking sales, gross margins or both when domestic currency appreciates or foreign currency depreciated. The impact of fluctuation in exchange rates has significant impact on SMEs. In general, when the domestic currency appreciates, importers benefit and exporters are adversely impacted and vice versa. However, the impact varies from sector to sector. Furthermore, the ability of different sectors to withstand the impact is not the same. For instance, the IT sector having higher margins than the handicrafts sector, can relatively withstand the adverse impact of the appreciation of the rupee to a greater level.
1. Impact on exporters: Currency fluctuation impact exporters
Before we look at these forces, we should sketch out how exchange rate movements affect a nation 's trading relationships with other nations. A higher currency makes a country 's exports more expensive and imports cheaper in foreign markets; a lower currency makes a country 's exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country 's balance of trade, while a lower exchange rate would increase it.
The exchange rates risk that is associated with economic, transaction, and translation exposure in Indian market. From the analysis, anticipate the fluctuations that seem to occur in the next 24 months
Due to the geographic diversity of countries where BHP Billiton has extended to, the variation of foreign exchange rate obviously plays a crucial role on its financial performance. According to the annual report of BHP Billiton (2015), US dollar is not only the functional currency utilized in majority of sales and transaction, but also the presentation
Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.
This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.
Foreign exchange risk consists of three main types of exposures. First, transaction exposure is when a firm has a contractual obligation under which it supposed to receive or pay a certain amount in a currency that is different than its home currency. Transaction exposure has an effect of the firm’s income statement because the accounts payables or receivables can be affected by currency exchange rates. Second foreign exchange exposure is the translation which impacts the balance sheet of the firm. It occurs when consolidating financial statements of foreign units into a company’s home currency. The third type of foreign exchange exposure is the economic which influences a firm’s cash flows when exchange rates change. This type of exposure can impact assets, liabilities, or any type of anticipated foreign currency cash exchange.
Evaluate the stability of the business. Look at the debts and creditors, the sales numbers, and if prior bankruptcy has been filed.
In India, about 670 industries are completely reserved for very small companies, which means that the economy lose the benefits of scale, don’t get foreign investments and are unable to compete globally. In 2001, the average Indian clothing company had only 50 machines, compared to 500 in the typical Chinese plant. The same problem
Currency risks are majorly involved with expanding into foreign markets. Due to the fluctuations of exchange rates, apples profits can vary due to demand and supply. The value of a currency is varied due to currency depreciation and appreciation and this fluctuation and
When an input (machinery, components, capital, labor, etc.) is denominated in a foreign currency, the risk exists that an unfavorable exchange rate movement will increase the cost of doing business. When the products are priced and sold in a foreign currency, an adverse exchange rate movement will make the product appear more expensive to consumers, decreasing demand or forcing the company to reduce its own profit margin to maintain lower price levels. For companies with integrated international business systems, an exchange rate shock can literally force them out of business, with their operations experiencing pressures from both cost and profit centers.
‘The category of micro, small and medium-sized enterprises (SMEs) is made up of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.’(Extract of Article 2 of the annex to Recommendation 2003/361/EC).
• Financial management effort: To minimize the risk of exchange-rate fluctuation and transactions processes of export activity the financial management needs more capacity to cope the major effort
The depreciation of naira over the years has caused many firms especially the import dependent firms to suffer many loses as a result of exchange rate fluctuations. This has further led to difficulty in
As technology improves, the wide use of “hard information”, such as the borrower’s credit history, reduces informational asymmetries. Therefore, long-distance small business lending is easier (Frame, Srinivasan, \& Woosley, 2001; Petersen \& Rajan, 2002). However, even with the use of credit score data, collecting ``soft information" still helps local lenders control risks to avoid delinquency (DeYoung, Glennon, \& Nigro, 2008) and provides informational advances in offering more favorable rates (Agarwal \& Hauswald, 2010).
Exchange rate represents the external value of a currency. Changes in exchange rates may affect the relative position of a country in the international trade. Politicians and economists concern about exchange rate variability for lots of reasons, among which that the exchange rate variability discourages trade comes first. However, a large empirical literature on this issue does not confirm a significant effect of exchange rate on the volume of trade [1]. Instead other variables such as employment should be much more important from a practical point of view, for it is closely related to people’s livelihood.