Trade war can hurt software & service businesses, too
Currency swings from global trade disputes can undercut service business profits - but often, the true impact is only noticed months down the line. While manufacturers may brace for tariffs and supply disruptions, service-based firms from SaaS startups to international consultancies are just as exposed to the shifting tides of foreign exchange (FX) markets. Yet, without the right tools and awareness, these risks might go unseen until it’s too late.
This post explores how trade wars and FX volatility affect service sector businesses, why losses can remain hidden in financial statements, and what steps you can take to protect your margins.
How currency moves can erode your profits
Trade wars make headlines for abrupt price swings of goods and disrupted supply chains, but the knock-on effect on FX rates is just as critical. Political tension, tariff talk, and the prospect of weakening the US dollar have sparked significant adjustment in currency markets. Since the start of April, the US dollar has weakened by more than 6% against Swiss Franc and Korean Won, and 4-5% against a wide range of currencies such as EUR, GBP, ILS and MXN. Despite regular denials from central banks and government officials, speculation over a weaker dollar lingers, and global currencies are moving in response.
For service businesses paid in one currency and with operational expenses in another, these FX moves quietly shape profit and loss. Unlike product-based businesses, where frequent orders and invoices can instantly reflect currency changes, the impact on services often lurks off the balance sheet.
Many finance teams only focus on FX losses once they hit the income statement. By then, much of the damage is already done. Worse, not all FX effects even show up in company accounts, masking real losses and eroding business value over time.
Hidden FX risks service businesses face
1. FX costs in software-as-a-service (SaaS) companies
Consider a SaaS company earning revenue in US dollars but employing developers in Poland, Israel or Mexico. Each monthly payroll is paid in local currency. When the US dollar drops 5% against the Polish Zloty, Israeli Shekel or Mexican Peso, your US dollar costs for software development instantly rise by 5%.
Since payroll is an expense, not an asset, it won’t appear on the balance sheet or reveal FX losses through your usual lines. You don’t see a separate “FX losses” entry in your profit and loss report for payroll outflows. Yet, if exchange rates remain steady going forward, your future R&D costs in dollar terms are now permanently higher. This quiet cost drag compresses margins and misses the eye of many boards and CFOs.
Example in numbers
Suppose you were spending $200,000 per month on developers in Mexico. If the USDMXN exchange rate drops 5%, your cost jumps to $210,000 almost overnight. But unless you’re monitoring real-time FX adjustments and adjusting forecasts, you may not react until the effect accumulates over many months.
2. Professional services and contract devaluation
Service firms based in the UK, but winning large contracts priced in US dollars (or currencies pegged to the dollar, like the UAE dirham or Saudi riyal), face a different trap. Long-term deals locked in at a fixed exchange rate may quietly decline in value if sterling strengthens or the US dollar weakens. Since many of these projects invoice as they reach milestones, the fall in contract value isn’t immediately visible on your books.
Out-of-sight, out-of-mind
Until an invoice is raised, the future revenue sits as an off-balance-sheet expectation. A change in the dollar’s value transforms the pound amount you’ll eventually receive, but unless you recalculate contract values regularly, the risk remains hidden. This can leave your finance team underestimating future threats to cashflow and profitability.
Why do these FX risks often go unnoticed
Service businesses have less tangible working capital than manufacturers. Currency effects filter through financial statements more slowly and often bypass headline metrics until the fiscal year closes. Payroll and professional fees are generally accounted for at spot rates, while revenue projections might lock in old assumptions.
Traditional accounting tracks realised gains and losses, but the impact of shifts in currency on future contract values or long-term overseas payroll is typically off the radar. This quiet erosion of profit can materially change your margin profile by the time anybody spots a trend.
Strategies for managing FX exposure
Proactive currency risk management gives service businesses a fighting chance—even amid a trade war. Here’s where to start:
1. Monitor and forecast FX exposure regularly
- Review your revenue and cost exposure by currency, not just geography.
- Use up-to-date budget rates - Update forecasts with current FX rates, not just averages or historical assumptions.
- Use scenario analysis to see how various currency moves would affect your cost base and contract values.
2. Hedge critical exposures
- Consider using currency forwards, options, or “natural hedges” (matching overseas costs to overseas income) to lock in FX rates where feasible.
- Hedging isn’t only for manufacturers or importers; service providers can and should use these tools for future payroll and receivables.
3. Build FX awareness into pricing and contract terms
- Negotiate contracts that allow for price adjustments if currencies fluctuate beyond certain bands.
- Include FX reviews in all major deals, especially for work delivered over six months or longer.
4. Improve internal reporting
- Encourage finance teams to report both actual and potential FX impacts.
- Raise board-level awareness of currency risks—even when traditional accounting doesn’t surface them immediately.
- Install dashboards or alerts to flag large, unrealised FX shifts that could impact future months.
5. Stay informed on policy signals
- Keep an eye on both official central bank statements and market speculation in international media.
- Assume that denials about currency intervention may be more political than practical, and look at price action in FX markets for the real story.
The silent cost of doing nothing
Currency-driven profit erosion grows more dangerous the longer it goes unaddressed. Service businesses, in particular, tend to be agile and cost-conscious, but ignoring FX exposure creates a blind spot that can wipe out hard-earned growth.
If your business pays international staff, delivers long-term contracts in foreign currencies, or relies on predictable margins for growth, FX risk from trade disputes is real and urgent. It’s critical to bridge the gap between finance and operational leaders to build resilience for whatever the global market brings next.
Try implementing some of these strategies or consult with a specialist to evaluate your current risks and possible protections. If you’re interested in more insights on managing FX risk or want help safeguarding your profits, check out our video explainer and get in touch with our team for a personalised assessment.
Take control of your service business margins today
Currency volatility from trade disputes is here to stay. Don’t wait for next quarter’s report to discover that avoidable profit loss is already baked into your numbers. Take a proactive approach to FX risk, educate your finance team, and incorporate currency moves into both planning and day-to-day decisions.
With practical steps and the right awareness, service businesses can stop hidden FX shifts from quietly eroding future value and keep financial performance on a solid footing—even through the headwinds of global trade wars.