The sterling currency, just like any major currency will fluctuate and slump in times of economic prosperity and recession. The impact that these fluctuating exchange rates have effect all companies that operate in the global market; British and foreign. A sharp rise in the pound means that in relation to other global currencies, the pound is worth more of other weaker currencies. For example in 1980 a pound could buy 525 yen (the pound was strong) whereas by 1995 the pound had fallen to just 135 yen. A strong pound has implications for UK business and this will be explored in this essay.
UK firms that import raw materials will be able to buy more products for their money. Manufacturing firms that receive supplies from Europe will find that they have reduced variable costs per unit. This can have many implications for UK firms. This will make them more efficient and able to break even much more easily. This is highly advantageous to manufacturing firms that import raw materials as, because they are able to produce more cheaply, they are more competitive than foreign firms in their markets as will therefore be able to sell more.
Larger companies may wish to use increased profit margins to spend on the recruitment and selection of new operations managers who would make the company more efficient and therefore competitive in the future. Public limited companies may use the opportunity to pay dividends to share holders ensuring their loyalty to the company, to maintain share prices and have potential capital that may need to be raised when the pound has fallen. Firms will be able to retain more profits in case the pound falls at a later date to aid future cash flow and future import costs .
UK tertiary industries such as car selling garages that import cars from abroad will also benefit from a rise in the value of the pound as they will be able to buy finished goods from Europe more cheaply. UK firms that buy raw materials from Britain and sell to UK markets will not be directly effected by fluctuations in exchange rates and therefore a rise in the pound. However, if competitors are purchasing raw materials from abroad they will be capable of lowering prices.
Consumers in an elastic market may choose to buy from cheaper firms and this would negatively affect UK firms who use British raw materials. Gearing and customer loyalty will be affected. Despite the obvious gains to firms that import, there is the opposite effect to British companies that export. This is because British products become more expensive in foreign markets as firms are forced to raise prices abroad if they want to receive the same amount of sterling for a product sold in Europe.
If prices are raised, demand will be affected if operating in an elastic market. This can be devastating to firms that only export abroad. However, firms may opt to maintain the price of goods exported abroad. This will primarily ensure consumer loyalty is maintained as consumers do not like fluctuating prices that can lead to economic unrest. This can have dramatic impacts on smaller manufacturing firms that supply to Europe. Liquidity will be affected, as will cash flow thus resulting in an unfavourable gearing ratio.
Smaller firms that only produce one product will feel the full extent of fluctuations of the pound and in the worst cases may be forced to cease production if the pound remains high. High export costs may make firms decide to try to sell products in British markets if they faced liquidation due to the a sharp increase in the pound. This would lead to a saturated market if other companies had the same idea and prices would fall dramatically. More over, foreign companies would find it cheap to export to Britain so British companies would have to compete against European manufacturers as well as UK.
In conclusion to the essay, it is evident that there are advantages and disadvantages to a sharp rise in the pound. Importing firms find a strong pound favourable whereas exporting firms find it detrimental. More manufacturing industries are closed in Britain and established abroad where labour costs and other overheads are cheaper. This would mean that, as a nation, we are becoming more tertiary inclined. This would mean that we import most of our goods. Thus, in the future, a strong pound will be beneficial to the abundant service industry and therefore the country as a whole.