Effects of Foreign Exchange Risks on Financial Performance of Fuel Companies in Uganda Case Study: Fuel Petrol Stations Around Business Area of Kampala.

Abstract

The study investigated the effects of foreign exchange risks on the performance of fuel companies. The study objectivities were: To examine the relationship and effects transaction risks have on the financial performance of fuel companies; To examine the relationship and effects translation risks have on the financial performance of fuel companies and To examine the relationship and effects economic risks have on the financial performance of fuel companies. A case study design was used and data collected from a sample of 56 respondents. Self-administered questionnaires, interview guide and documentary review guide were used in the study. Findings were presented in a tabular format showing frequencies, and percentages. Findings from the study indicate that Cash flows have been positively affected by the variations in the exchange rates for the past two years and that Profits are determined by whether the change in currency favors the company and a change in the value of foreign currency is related to our sales revenue derived from offshore of enterprises. Further, Contracts, agreements, purchases and sales are negatively affected by a change in exchange rates at the beginning and end of the accounting period. it was also revealed that Profits are affected when the balance sheet exposures for foreign subsidiaries are consolidated at the prevailing exchange rates and also that The sales revenue we make depends on the spot exchange rate at the time of settlement. It can also be conclude that immediate cash flows and future cash flows are positively affected by unexpected changes in exchange rates and also that profits are negatively affected by the unexpected changes in the exchange rates. Finally the study also recommended that It is recommended that the alternative methods of managing foreign exchange risk can be used when the timing of the foreign currency inflows and outflows don’t match. The timing issues can be managed by depositing surplus foreign currency in a foreign currency account for later use, or by borrowing foreign currency to pay for foreign currency purchases, and then using the foreign currency to repay the loan. Since economic risk is difficult to quantify but a favored strategy to manage it is to diversify internationally, in terms of sales, location of production facilities, raw materials and financing. Such diversification is likely to significantly reduce the impact of economic exposure relative to a purely domestic company, and provide much greater flexibility to react to real exchange rate change

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