Economics Coursework - Impact of a Change in Currency Exchange Rates on Burberry Group PLC

Introduction

In my study I have chosen Burberry Group plc, it is one of the best-known company in the fashion industry. The firm has complex activities as it deals with the production, distribution, and retail of expensive and extravagance fashionable products. The Company likewise licenses through other developing company via franchise to make and disseminate items utilizing the Burberry trademarks. The Company's item divisions are Women's, Men's and Children's clothing, Accessories, and Beauty. Similar to the other companies the change of the exchange rates is very vital and affects the company financial management. The standard economic analysis implies that exchange rate movements affect both the cash flow of a firm's operations and the value of a firm. The wide currency fluctuations in the currency exchange rate that was experienced for the last few years decades has increased the interest in the potential vulnerability of multinational firms Burberry Group plc was not left out.

Impact of a change in currency exchange rates

The exchange rate can have a direct or indirect on the company financial statements. No business is an island as it relies on different organizations which may be influenced by trade rates. For instance, Burberry Group plc buys and sells from other companies, and it uses other company by utilizing trucks to move its items around the nation. If the that they're a change in the in the price of the oil as in the year 2012 it resulted to changes in the cost of the fuel those trucks utilize changes and that influences the expenses of the business thus increasing the costs (Warriner, 2011).

Disadvantages to Burberry Group plc

As from the financial statements of the company in 2015, there was a fluctuation in the exchange rate, and it affected the company especially when it came to importation. Foreign exchange fluctuation is somewhat more unpredictable because of these Burberry Group plc frequently direct exchanges in various distinctive monetary forms and tend to get its raw materials from a wide assortment of sources. For example, Burberry Group plc, some of the materials, to be used in production by the company in U.S. were sourced in Europe and would likely observe their edges endure a shot at higher expenses. At the point, it was when unstable foreign exchange rate and this resulted in the company making massive losses. Such fluctuations in the exchange rate influence the cost of the company and hence the profitability. Compared to the previous year the company profitability had reduced. Burberry Group plc is a British company it has branches in the US and from the statements we saw the company had paid its workforce in euros. As from the financial information it had an adverse impact on overall expected and the actual company profits, and thus reduced the company equity and value of shares (Zannetos, 2016).

Advantages of change in currency exchange rates on Burberry Group PLC

On the other hand, the firm could keep the cost at 7,500 and simply make a greater net revenue if the exchange rate reduced. It is one of the advantages that are associated with the currency fluctuating exchange rate. It is a very common decision for exporters to have a reduced European cost and offer progressively or keep the value the same and make a more significant net revenue. The drawback of deterioration is that Burberry Group PLC who import raw materials to make clothes will see an expansion in the cost of purchasing the needed materials. If the Burberry Group PLC organization imports products from other company with a higher rate. This will lessen its net revenue. In the long haul, it is contended that a fluctuation in the exchange rate may diminish the motivating forces to cut expenses. The deterioration empowers a 'simple' increment in their net revenue. Subsequently, there might be less motivator to cut the costs and lift efficiency.

Conclusion

The high instability of trade rates is an unavoidable truth looked by each organization occupied with universal business, getting vulnerabilities in their primary concern. As of late, variety in the estimation of United States dollar has been exceptionally imprudent and eccentric. Each business Burberry Group PLC enters in can result to profit or loss as the exchange currency s variable and in the company`s future monetary incentive due to the difference in remote trade rates. It is showed by the introduction, how much an organization execution is influenced by swapping scale changes. I would recommend adherence to outside trade hazard administration, which includes cash appraisal (distinguishing proof and measurement) and planned counter-methodologies against foreign exchange risk.

References

Warriner, R. (2011). Michael J. Greenwood & Watson. Popul Res Policy Rev, 30, 839-859. Retrieved from https://www.colorado.edu/Economics/courses/spring12-4292-001/Greenwood%20and%20Warriner%20TB%20paper%20PRPR.pdf

Zannetos, S., & Talias, M. A. (2016). A Cost-benefit Analysis of a Proposed Immigrant Latent Tuberculosis Infection Screening Program for Cyprus. Material socio-medica, 28(6), 464. Retrieved from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5239655/