Economic exposure is a risk faced by businesses from unforeseen and unexpected strong currency fluctuations on the organization's money expected cash inflows and the value in the market. It is simply the risk involved with the changes in the rates of exchange of the currency and is tricky to the businesses since they depend on many market factors hence impossible to predict the future trend of the exchange rates (Chow, Lee & Solt, 2007). The worst part about the economic exposure is the long-term nature it has on the businesses and the impacts of this felt for a longer period. The companys competitive edge affected even though it is sells its products locally. For instance, a local manufacturer may feel the pinch as existing and potential clients may prefer importing as it is cheaper and it improves if the currency strengthens remarkably.
The success and stability of a business depends on many factors, which when well combined in the right proportions, helps the firm reflect a healthy financial performance in the financial statements (Chow et al). Financial statements of an organization reflect more information on how the economy is and investors and financial analysts use this information to interpret the wellbeing of an organization.
Such an occurrence has detrimental impacts on companies, which have future expectations of making profits. Firms like Nestle will have their economic value affected since the depreciation of the pound against the dollar will be lower hence decreasing the price that competitors charge on a similar product (Marston, 2001). Royal Dutch Shell and Astra Zeneca will have the effects felt from clients opting for competitors products thereby decreasing the amounts in revenues earned. The impact on these companies will be on the management since they will have a disappointment measured on expectations versus the reality. Management has to make adjustments to cope with the new changes on the exchange rates and the fluctuations.
Impact of weaker dollar on financial performance of corporations
The impact of the economic exposure will be on the sales and the flow of cash as both will reduce significantly (Chow et al). This reflected in the financial statements, as the sales affected are those on the outside market other than the local market for the products. This is because companies outside the borders of the United States will feel the effect of the economic exposure less than local companies.
The products from the competitors decrease and hence most people look for cheaper products thereby avoiding the products and services they deem expensive (Marston, 2001). It is hard for the common person to understand the impact of a weaker dollar since the products used to make the final product becomes more expensive and hence the organization has to increase the cost it charges its products in order to make profits or even operate without making profits and have a break even.
Importing becomes cheaper for clients while the rate of exports to other markets for these companies like Nestle becomes more expensive and the foreign currency traded at higher or lower amounts, against the dollar depending on the amounts in exports (Marston, 2001). The financial performance declines and for some businesses without established markets, they may go out of business especially if they do not have markets outside their borders.
Chow, E. H., Lee, W. Y., & Solt, M. E. (2007). The economic exposure of US multinational firms. Journal of Financial Research.
Marston, R. C. (2001). The effects of industry structure on economic exposure. Journal of International Money and Finance.
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