Many SMEs focus on the perceived cost of currency hedging. What they fail to measure is the cost of inaction. If a business chooses not to hedge, it is accepting whatever the market delivers and sometimes that works in its favour. More often, it introduces volatility that management neither wanted nor budgeted for. Over time, the impact can be substantial with a few percentage points lost on exchange rates having the potential to quietly erode margins, distort budgets and turn what looked like a profitable year into a disappointing one.
What makes this particularly striking is that many business leaders are fully aware of the issue. They know they are exposed to currency movements. They understand that a stronger euro or a weaker pound can increase costs or reduce overseas revenues. They may even have discussed hedging at some point. And yet, despite this awareness, most never take the next step.
That hesitation is more costly than many realise because when a company chooses not to hedge, it is simply accepting risk. It is making an implicit decision to leave a portion of its profitability exposed to events that are entirely outside its control, from interest rate changes and geopolitical shocks to unexpected shifts in market sentiment.
In effect, every unhedged business is placing a silent bet that currency markets will remain benign. Sometimes that bet pays off. Often, it does not.
Why smart people ignore an obvious problem
This isn’t a story about financial ignorance. Most SME finance teams understand exactly what’s at stake. They know that a 10% move in sterling changes the numbers in ways that are hard to explain away. They’ve done the mental maths.
The problem is that hedging sits in a particular purgatory: important, but not urgent – until it is.
For a growing SME, where finance teams are often stretched and founders are focused on growth, “important but not urgent” is where good intentions go to die. There’s always something more immediate, whether that be a hire to make, a deal to close or a cash flow crisis to navigate.
If currency risk has not yet caused visible pain, it’s easy to push it to the bottom of the list. So, the FX policy gets pushed to next quarter. Then the quarter after that. Until the market moves and suddenly next quarter is the problem.
Currency hedging is simpler than the jargon suggests
Inertia is a real issue, but perhaps more challenging is hedging’s reputation problem. Words like “forward contracts“, “mark-to-market” and “collateral requirements” make it sound like something that requires a dedicated team and a risk committee that meets every Thursday.
Most CFOs, already stretched, hear that language and quietly decide it’s not for them.
But strip away the jargon and the concept is almost embarrassingly simple. Hedging means increasing certainty by locking in future exchange rates so you know with greater confidence what your costs and revenues will actually look like.
That’s it. You’re not trying to beat the market. You’re just refusing to let it blindside you.
Hedging is less a sophisticated financial process and more a basic act of business management.
The hidden cost of doing nothing
One of the biggest misconceptions about hedging is that it’s expensive – the admin, the credit requirements, the possibility of locking in a rate that turns out to be worse than where the market ends up.
Those are real considerations. They’re just the wrong ones to obsess over.
The question that actually matters is: what does it cost to stay exposed?
If rates move 10% against you over the course of a year and you’ve done nothing, that hit goes straight through to your margins. In some businesses that’s manageable but for others, it wipes out a meaningful chunk of annual profit.
So, why does it keep happening?
Often, the incentives are pointing in the wrong direction. If a hedge works perfectly, it’s invisible and nobody thanks you for the crisis that didn’t happen. But if the market moves in your favour after you’ve locked in a rate, the questions start. Many finance directors, understandably, conclude that the professional risk of acting outweighs the professional risk of doing nothing.
Founders and CEOs of SMEs who do hedge well tend to see it differently. They’re protecting the business, not managing a reporting line. For them, the real risk is that not hedging will cost far more than the money lost from actively doing it.
What the minority get right about currency hedging
Indeed, the SMEs that hedge successfully tend to view currency risk as a strategic issue rather than an unavoidable inconvenience.
Most of them got there the hard way – through experience, a painful year or by bringing in someone who’d seen it before and knew what a proper policy looked like. Some worked with advisers who cut through the complexity and gave them a clear, practical framework.
What they all share is a change in mindset. They stopped trying to predict where sterling was heading and started focusing on making sure the business could plan with confidence, price accurately and grow without being ambushed by something entirely outside their control.
In fact, the best SME hedging strategies aren’t complicated because they don’t need to be.
They start with a realistic view of future cash flows, a clear sense of the company’s risk appetite and an honest conversation about how much certainty management actually needs. From there, a simple, consistent policy does most of the work.
The goal isn’t necessarily to beat the market but to reach the end of the financial year with your margins intact and your budgets still meaningful. Businesses that do this well treat hedging as a long-term discipline, not a one-off trade. They accept that some individual positions will look suboptimal in hindsight. They don’t care, because the cumulative value over years isn’t in any single transaction but rather it’s in the stability and predictability and the absence of nasty surprises.
Consistency wins. Every time.
The cost of standing still
The most dangerous idea in this whole space is that doing nothing is the cautious choice.
It feels cautious. It requires no decisions and no paperwork. And there need not be any explanations to the board about why you locked in at that particular rate. It looks like prudence.
It isn’t. It’s an active choice to remain fully exposed to one of the most volatile and unpredictable forces in global business.
The SMEs that hedge well understand that currency risk isn’t a theoretical problem or a large-company concern. It’s a direct threat to margins, cash flow and the ability to grow on your own terms.
A simple policy changes that. It doesn’t require perfection, just intent.
About the author
Prit set the long-term vision and strategy of building the world’s leading alternative to a bank for mid-market businesses and high-net worth individuals. He has over 20 years’ experience in electronic trading, building digital hedging platforms, and experience fundraising through various stages of growth.
ALT 21 Limited is authorised and regulated by the Financial Conduct Authority [FRN:783837]. ALT 21 Limited is a company registered in England and Wales [number 10723112], with a registered address of 45 Eagle Street, London WC1R 4FS. This document is provided for your information purposes only and does not constitute investment advice, a personal recommendation, or an offer to enter into any transaction. Alt21 provides tools and information to support clients FX risk management. Hedging strategies can help reduce the impact of FX movements, but they do not eliminate currency risk and may limit potential benefits from favourable moves. Hedging involves costs and may mean you do not benefit if exchange rates move in your favour. Some hedging instruments can be complex and may not be suitable for every business. Your decisions should be based on a clear understanding of the products and risks involved. You should consult with your tax advisors and auditors regarding accounting and tax implications.
