The lower Canadian dollar is helping to boost the bottom line for small businesses exporting products to the United States, but a chunk of those profits are being eaten up by the higher cost of importing goods from the country.
Big swings in the value of the loonie are changing prices for inputs and value of sales, making it harder for businesses to plan and ensure profitability.
To cope, many small businesses are trying to stabilize their costs through foreign exchange products that lock in an exchange rate for a certain period of time, known as hedging and "natural hedging," such strategies include setting up a bank account or even operations in the U.S.
"Companies can't just take a low dollar itself and count on that to make them competitive. They have to continue to invest in new products and new technologies and an awful lot of that depends on imported equipment and goods," said Jayson Myers, president and chief executive of the Canadian Manufacturers & Exporters.
He said hedging strategies could be crucial for some companies doing business in the growing and often lucrative U.S. market.
"Prices for imported products and equipment are gyrating wildly, largely as a result of financial turbulence. There is very little companies can do – other than trying to mitigate the risk around that through some form of hedging strategy," Mr. Myers said.
Businesses that want to hedge the currency have two main options: forward contracts and options. A forward contract is an agreement to exchange a certain amount of currency on a set, future date. The guarantee allows businesses to know in advance, no matter which direction the loonie goes, how many Canadian dollars they'll be getting in exchange for American ones.
Options, however, are more flexible and more liquid because they give the buyer the right, but not the obligation, to buy or sell a specific amount of one currency against another at a future date. The option holder usually exercises his or her right when it suits their needs and is financially beneficial. The drawback is that, unlike forward contracts, the holder must pay an upfront premium to purchase the option.
Most Canadian exporters choose forward contracts because they are easier to use and understand, and there's no initial cash outlay, according to Export Development Canada (EDC).
Rhonda Barnet, vice-president of finance at Steelworks Design Inc., in Peterborough, Ont., which manufacturers custom machinery for auto makers and other global customers, said her company is looking to fix costs by hedging the U.S. dollar through an a foreign exchange account set up through EDC.
It would be the first time Steelworks has had a hedging strategy in its 13 years of operation, as it expands more aggressively into the U.S. – a market that now account for about 50 per cent of its sales.
"In previous years we would just roll the dice," said Ms. Barnet. "Given the volatility of the dollar it's more important than ever to hedge."
She also said the company is using EDC because they're not big enough to have a department to deal with managing the fluctuating currency.
The EDC released a survey late last year showing three out of four respondents would accept lower profits to minimize risk. "Most firms that manage foreign exchange risk are doing so to protect profit margins on export sales," the EDC report says. It said protecting profit margins was the primary objective among 85 per cent of respondents, while 55 per cent said increasing the predictability of profits was key.
EDC offers a "foreign exchange guarantee" for small businesses, which it says will free up money for companies to run their businesses with more predictable cash flows. For example, using a $1-million foreign exchange contract with a bank, a business would be asked to provide about 15 per cent of collateral to the lender – or about $150,000. Through EDC, instead of the customer having to provide the collateral, the credit agency would provide a guarantee to the financial institution worth the $150,000. The business is charged a premium, usually between one and two per cent, which is paid separately from the base amount.
Benoit Marcoux, product manager, business and international solutions at National Bank, says his firm is seeing a growing number of businesses seeking out hedging strategies as the Canadian dollar weakens against the U.S.
Companies with fixed prices over the next year, who haven't hedged, could see a significant hit to their balance sheet. Even those who haven't yet hedged may choose to lock in a rate for a short period of time to stabilize their books.
"When you're in that position, you just want to make sure that you don't get hit again. Markets are impacted by a lot of factors and you never know what can happen," said Mr. Marcoux.
"What we want is for our small- and medium-sized business customers to avoid these unnecessary risks. We offer tools to make uncertainly go away and work with a clearer outlook for the next few months or even the next few years."
Some companies have "natural hedging" programs in place, where benefits come from basic business operations and long-term strategies such as setting up a U.S. bank account or operations in the U.S. to avoid the exchange rate.
An example is Winnipeg-based parts maker Acrylon Plastics Inc., which has five operations in Canada and one in the States. Its U.S operations are run separately and Acrylon has a U.S.-dollar bank account to try to avoid the currency game.
"It hasn't been a huge win or a huge loss and we're happy with that," said Craig McIntosh, Acrylon's executive chairman. "I would rather minimize [the currency impact] so that my business has consistency without having to worry about the currency gain today and tomorrow."