Blank Sheet Treasury

08-03-2021 | Jesper Nielsen-Terp | treasuryXL |

In uncertain times like the financial crisis in 2009 and the Covid-19 pandemic in 2020, the old phrase “Cash is King” always pops up. By the end of day the Treasurer and the Treasury Department once again sit in the middle of the fire. Although it is the Board of Directors who is overall responsible for the financial strategic target settings, which is influenced by the CEO or the CFO, tasks and responsibilities flow from the top management and end up at the Treasurer’s desk.

To be prepared for the fireplace, I believe that it is crucial for the Treasurer or the Finance Department employees carrying out treasury activities, that a clear strategy is implemented and outlined. Not only a strategy for how the policies and guidelines are carried out but a strong mandate from Top management and maybe all the way from the Board of Directors. A mandate carved in stone, so no one can be in doubt when something hits the fan.

“Do not ask what the company can do for you, but ask…”

There are a couple of questions that all back office functions need to ask themselves on a regular basis. The answer to the questions should dictate the activities that are undertaken on any given day. First, they should ask, “Is this activity going to increase the company’s revenue?”.  If the answer is no, they should move on to question number two, “Is this activity going to reduce the company’s cost base?”. Once again, if the answer is no, then they should move on to question number three, “Will this activity delight the customer?”.  If the answers to all three of these questions are no, then we need to examine the activity to understand why we are conducting it.

The Blank Sheet Treasury

In order to understand why the recommendations that follow are applicable, we must decide what it is that we as a Treasury Department are trying to accomplish and why.  There are certain practices in Treasury across the world that should drive our behavior. In examining these practices, one potential structure emerges; the Blank Sheet Treasury. This way we are starting with our objectives and future state in mind instead of our current state.

In my opinion, the future state should equal the Treasurer to be prepared and know how to handle future potential crises, whether it is a business-related financial crisis or a worldwide pandemic.

Coming back to the phrase “Cash is King”, when in the middle of a crisis, everything else than access to cash or cash visibility should be a next-day issue for the Treasurer. Stating this should give an idea of why I believe the Blank Sheet Treasury always should start within the area of Cash/Liquidity Management, which of course can come in many different flavours.

The initial process

Coming back to the statements about having a focus on the future state and the mandates to get there, the initial process visualized below is a tool that the Treasurer needs in his/her toolbox. Maybe not the most innovative tool, but most likely one of the most important tools, if not the most important, when shaping, re-shaping and driving treasury.

The process map works like a Lego building instruction, where there actually is a possibility to skip or change the order, but when doing it, the result will not be what we were aiming for, or even worse than what our surroundings (stakeholders) thought we were aiming for. So if the order somehow is changed or some parts are skipped, it will be similar to an “unfinished” Lego construction. It will in some cases be functional, but there will always be some spare and important “bricks” left on the table. In the Lego context, some left bricks might not make a difference or at least not a huge difference, but in a corporate context the repairment will have a critical impact on time, costs and loss confidence from stakeholders.

The foundation for everything else

Before moving to the discussion on the Leadership mandate and afterwards on daily-life guidelines for the Treasury Department, let’s first make sure that a part of the objectives and future state is the idea that everything is to be accomplished (now or in a few years). Not only will it be a guidance for the “how, when and why”, but also because top management, that give access to the budget, want visibility and take decisions based on valid information.

As the majority of Treasurers and their departments have Cash/Liquidity Management as one of their key deliveries and as the Cash/Liquidity Management highly impacts other workflows in the Treasury Department, it is somehow the foundation for everything else and therefore a good place to start.

This figure is of course not a golden rulebook, and for some Treasury Departments priorities can come in another order. But when talking to Treasurers about their priorities and building or re-shaping their setup, the figure outlines to a great extend how they see the structures and how they want to manage the process of reaching the end line.

Best Practise and Future Workflows

Each of the circles has some underlying characteristics and is decomposed into a number of workflows. Here, the objectives for the future state and best practise will come into play.

In this recommendation, Cash Management is identified as the foundation for other workflows. Next to that, when looking into job descriptions and talking to Treasurers about their key objectives,  FX Risk Management is identified to be high on the agenda. Therefore, the following graphs will assist the visualizing and guidance of Cash and FX Risk Management.

 

The Best Practise box has to be filled out by the company (the Treasury Department), based on their needs and very much linked to the Objective/Future State. The question asked here is; ‘’Does the Company actually know what is the best practise in each of the work flows or could there actually be multiple solutions for the Best Practise?’’

The answer for both questions will for the majority of companies be that the Treasury Department has some thoughts and ideas for what they see as Best Practise for their setup, but at the same time they will recognize that a solution for the future state and the Best Practise for this, can come in different varieties – it is not a One Size Fits All. When agreed on the Best Practise for the future state, it will then be time to start visualizing the future workflows, which will give some thoughts and ideas for what actually has to be build, changed and implemented.

 

One of the pitfalls to avoid here is to not look too much into what worked in the past and in addition avoid looking at single workflows (in this example Cash and FX Risk Management).
As a normal part of being a human being, there can be a significant probability to start applying what worked well in the past, because the Treasurer might have some experience or preferences from similar projects. Thus, there will be a tendency of implementing same workflows and systems used in the past, even though they do not fit into the entire puzzle.

 


The entire puzzle

Likewise in our own life, the CFO wants to see the full picture and understand the full picture, before opening up the purse and increasing capital expenditure. With this in mind and the objective of getting a budget, do not only look into the short term and easy reachable targets, but think big and lay out the entire puzzle. Still continue to grab the low hanging fruits though, because they are to be grabbed in order to keep momentum.

What is the entire puzzle and how can it be shown in a simple, but informative structure, so no one will be in doubt of the individual workflows on the journey of reaching the objectives and creating a best-in-class treasury setup.

To assist on laying out the entire puzzle, all workflows will be identified and structured by its “Value” and “Importance”. Therefore, the below chart can be the guidance for where to start as well as be used in the dialogue with the CFO and other stakeholders. Once again it is important to state that the chart is not a golden rule book, but an inspiration for how to make progress on the journey.

 

The red box will obviously be the initial most wins and the focus areas. Even though most wins have been identified, the entire puzzle is still unfinished, because it is actually laying like a puzzle.

The box has been unpacked and the puzzle pieces has been sorted.  The next step for the Treasury Department will be to make the final move and bring their game plan. A game plan divided into a number of streams showing the how, when and why.

*Policies/Procedures are in the initial phase not a part of the Blank Sheet Treasury, but is stated above in each of the streams as it is something which need to be in place when start implementing.

 

Using streams and a given timeline for each of the streams as well as combining the different areas and the workflow process identified, the Treasurer now has made a construction manual for how to implement a best practise setup for the future state.

When utilizing some or maybe all of the recommendations and figures in this article, it will be possible for the Treasury Department to start taking the dialogue with the CFO and potential other stakeholders, who need to be involved in the process. Because when being able to identify the how, when and why, and showing the entire process and the needs, the CFO can see the entire picture. A picture which can be used when moving into the next section, where mandates will be given to the Treasurer and a budget needs to be allocated.

Additional considerations

When using a Blank Sheet Treasury setup, the probability of succeeding is higher if no planning has been made. Moreover, the Treasurer needs to consider whether or not the right resources are in place when moving into the building, crafting or re-shaping the phases. When talking about resources, it will both be human resources and resources in terms of systems.

In terms of human resources it can be internal resources, such as treasury and/or IT people, or external resources, such as treasury consultants. Speaking about consultants, it might be worth considering. Even though it comes with a cost, advantages are gained in times and knowledge.

On the system side, the Treasurer will have to decide whether or not he/she can bring his/her plan to live with the existing system landscape, and if not, the process will have to be added with a suggestion to make changes to the current system landscape.

Thank you for reading and looking forward to your thoughts.

 

 

Jesper Nielsen-Terp

Treasury & Risk Management Expert

 

 

Hedging Intercompany Loans: A New Way to Mitigate FX Risk

03-03-2023 | treasuryXL | Kantox | LinkedIn | “By using conditional stop-loss and take-profit orders, you can achieve significant savings in terms of the cost of carry.”

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Mitigating Behavioural Biases in Currency Management

28-02-2023 | treasuryXL | Kantox | LinkedIn |

This episode of CurrencyCast dives into the impact of behavioural biases in currency management and how they impact financial decisions. You’ll learn about the most common biases that can affect decision-making, including conservatism, forward rate, overconfidence, and loss aversion biases. But fear not! The episode also provides solutions to mitigate these biases and optimise your currency management strategies. 

Disclaimer: This information is being shared for informational purposes only and was originally published by Kantox (Source)

 

Discover how implementing automation solutions can help remove systematic errors and allow you to embrace foreign currencies, increasing profitability and fostering growth. 

Don’t let inherent biases affect your work – watch the latest episode of CurrencyCast and take control of your currency risk management today!

Unlock Your Treasury Expertise Today – Download Our Free eBook!

23-02-2023 | treasuryXL | LinkedIn |

Upgrade Your Treasury Expertise Today! Calling all Treasurers, CFOs, Cash Managers, Controllers, and Finance Addicts! Don’t miss out on the chance to enhance your financial skills and gain a competitive edge in the fast-paced world of finance. Our free eBook, “What is Treasury?”, provides a comprehensive guide to treasury management.

Download the comprehensive eBook on Treasury function, compiled by treasuryXL. This valuable resource covers a wide range of relevant topics including Treasury, Corporate Finance, Cash Management, Risk Management, and Working Capital Management.

Drawing on the expertise of Treasury professionals and their best practices, we have carefully crafted clear and concise articles that provide you with the most crucial information about the key topics in the world of Treasury.

In this eBook, we take a deep dive into each Treasury function and explore:

  • The purpose of each Treasury function, including what it is and why it matters
  • The role of specialists in each function
  • Examples of common activities associated with each function
  • A summary of frequently asked questions and answers
  • A conclusion that ties everything together

Whether you are new to Treasury or an experienced practitioner looking to expand your knowledge, this eBook is an essential resource that will help you stay up-to-date with the latest best practices and insights in the field.

How to receive the eBook ‘What is Treasury’ for Free?

We simply giveaway two presents for you! By signing up for our newsletter you will automatically receive the following in your inbox:

  1. On Fridays, our Coffee Break weekly newsletter will land in your inbox. In this weekly newsletter, we will highlight the whole week full of the latest treasury news within our community.
  2. The 41 pages eBook, What is Treasury?
Subscribe and Download

 

Subscribe, Join, Download and Relax.

Welcome to our community and have fun reading!

 

 

Kendra Keydeniers

Director, Community & Partners at treasuryXL

 

 

Recording | Your Currency Management Toolkit for 2023

22-02-2023 | treasuryXL | LinkedIn | On January 24th, 2023 we hosted a joint webinar with our partner Kantox about the Currency Management Priorities for 2023. In this 45 minute session we take you through the key trends and opportunities in currency management.

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Is Your Foreign Currency Risk Out of Control? 5 FAQs

20-02-2023 | treasuryXL | GTreasury | LinkedIn |

When left unaddressed, foreign currency risk can wreak havoc on your bottom line. But it doesn’t have to be this way. To keep foreign currency fluctuations under control and drive predictability in financial statements, many companies turn to FX hedge programs.

Source: GTreasury

Here are 5 frequently asked questions about foreign currency risk and FX hedge programs.

#1. What is Foreign Currency Risk?

Foreign currency gains and losses occur when a company transacts in a currency other than their home currency.

A foreign currency transaction results in either a payment or receipt of that currency and the amount of U.S. dollars it will take to pay the payment or collect from the receipt changes with exchange rates.

When companies have hundreds or thousands of these types of transactions, the gains and losses due to the exchange rates can add up quickly.

#2. Are Gains from Foreign Currency Fluctuations a Good Thing?

Even though a large gain on your bottom line seems appealing – especially compared to a large loss – it also indicates instability in your financial statements month-over-month and year-over-year. Not to mention, the nature of fluctuating exchange rates means times of gains are temporary and large losses are inevitable.

More often than not, companies value predictability and stability in operations. And that’s what an FX hedge program provides.

#3. What is a Foreign Currency Hedge Program?

An FX hedge program protects the amount of home currency needed to make a foreign payment or receive from a foreign currency collection. In doing so, it eliminates a majority of the foreign currency gain and loss noise in financial statements you may have been experiencing. Large swings in either direction will no longer happen, which means you’re able to explain your true business results more effectively to your Board.

#4. Does a Hedge Program Create Zero FX Gain/Loss?

A hedge program doesn’t mean zero FX, but it does reduce a majority of the fluctuations. What’s left over can be explained by a handful of “buckets” – such as un-hedged currency impacts or under-hedging a currency amount.

#5. Can an FX Hedge Program be Implemented Quickly?

Yes! Starting a hedge program can be done quickly. Many times, a foreign currency risk problem can be fixed in just a few weeks or months – especially when you work with a partner that puts programs together every day. Supported by automation, your FX hedge program can get up and running fast – and continue to run seamlessly from there.

Conclusion

Companies operating internationally are exposed to currency risk – a risk to earnings driven by changes in currency exchange rates. The ones that hedge their currency risk have certain advantages over non-hedgers. For example, instead of just experiencing the changing exchange rate impacts, these companies are afforded predictable results and time to react to changes.

If you’re curious about implementing a hedge program or just got tasked by your Board to fix a problem Hedge Trackers can help – and fast.

Treasury fundamentals in 2023

17-02-2023 | treasuryXL | Kantox | LinkedIn |

Get ready for 2023 with our deep dive into the treasury fundamentals that will take over the currency management scene. All you need to know, from trends to technology, in one article.

Disclaimer: This information is being shared for informational purposes only and was originally published by Kantox (Source)

CFOs and treasurers are getting ready to face the many challenges of 2023. Finding the right approach to currency management will help them protect their company’s margins and adapt to the new reality.

In this episode of CurrencyCast, we sat down with our special guest, François Masquelier, for a complete session on the treasury fundamentals for 2023.

In this article, we will take you through:

  • Trends in currency management to watch out for in 2023
  • How to drive better currency management
  • Technology and tools to optimize FX risk management

Setting the scene for 2023

Let’s analyse what upcoming currency management trends are going to be the main focus for treasurers this year.

Challenges and opportunities in currency management

When we take a look at recent European Treasury surveys, the PwC global annual survey and the last OECD survey or surveys, there is a common theme regarding the main focus for treasurers this year.

FX risk management is a top priority for corporate treasurers from 2023 onwards, right behind cash flow forecasting and digital transformation. This means that FX risk remains highly ranked by treasurers, and there are several reasons for this.

  1. First, the FX rate is highly volatile. And we saw this volatility in the last couple of months or years with COVID, the war in Ukraine, etc. It does not seem like this is going to shift towards decreasing market volatility for FX currencies. Interest rates are important due to swap points, differential interest and commodities.
    CFOs need to protect operating margins as currency movements can affect them, thus, solid and efficient hedging strategies and tools are necessary. Despite this, corporate treasurers focus on manual processes, as automation is lacking.
  2. Another key factor for the importance of FX risk is digital transformation. CFO and treasurers are shifting their traditional mindset to consider the implementation of new financial tools and technology.
    And this is mainly because they have started to realise that automation and digitization could be a way to reduce that risk or, at the very least, to improve the management of said FX risk.
  3. Finally, last but not least is cash flow forecasting. It has been a top priority for a couple of years now; for 2023, it should remain a top priority. And again, for the same reason, because we live in a world of uncertainty.
    So finance professionals need to make sure that they have accurate data and accurate forecasts. Otherwise, it would be difficult to manage your FX risk properly.

Large interest rate differentials

Sometimes CFOs do not always understand all the possibilities in terms of what we call optimizing forward points, that is to say, interest rate differentials.

The forward points may be a concern when there is a significant differential of interest, especially with exotic currencies. So it could be expensive to hedge certain currency pairs, depending on which side you are in. Sometimes those forward points could be in your favour, and sometimes could not be in your favour.

Treasurers with a favourable interest rate differential can decide not to hedge at all and just monitor the exposure. This is feasible, but as it is a highly manual task, the monitoring process of the open exposure can become quite tedious and inefficient.

However, the good news is that there exist certain solutions that allow them to dynamically manage your FX exposure. This way, finance professionals can reduce or mitigate the impact of the swap points and, ultimately, reduce the impact on costs.

The multicurrency world

The dollar and the euro remain important currencies, but there is a number of currencies from smaller but well-managed economies gaining ground.

As corporate treasurers are taking advantage of the benefits of buying and selling in more currencies, there is a microeconomic and bottom-up phenomenon leading to that multi-currency world.

Using the more exotic or smaller currencies, if managed properly, can protect your company against risks. The best approach to currency management this year is to use the most profitable currencies all the time.

Better currency management is possible

You can prepare for these trends if you have a strong currency management system that covers the entire FX workflow and allows you to have clear visibility over your exposure. Take a look at the two main areas that could be affecting your currency management strategy.

Accurate cashflow forecasting, or not?

Sometimes the importance of having accurate cashflow forecasts is somewhat overstated when it comes to currency management.

Let’s take the example of a micro-hedging program for firm sales or purchase orders. The exposure to hedge is already a contractually binding item, not a forecast at all. So we don’t have really much of an issue.

On the other hand, if you take the case of a layering program or layered hedging program, the FX rate would be built in advance, so the forecasted exposure to hedges is also known well in advance.

And finally, thanks to conditional orders that protect a budget rate, the Treasury team can have time to update and finetune their cashflows.

Fewer silos, better treasury

At Kantox, we believe that currency management is more than just currency risk management, and that currency risk management, in turn, is more than just the instant execution of a hedge.

But that requires a holistic approach to currency management, to cover the entire FX workflow.  This means doing away with a siloed approach that allows the company to grow beyond imagination.

In treasury and finance, there are many silos that impact the optimal management of the department. Having clear communication and flow of information with other departments is vital. It provides better visibility of the exposure and gives the CFOs the ability to react to the volatility in the market faster.

Something key in the challenging context we are facing that impacts the very thin operating margins, and a great way to generate added value to the treasury function.

One clear example of this is the companies with subsidiaries that operate in foreign currencies. By offering the subsidiaries to invoice or be invoiced in the local currencies, you are centralising the FX risk, generating value for them and improving risk management.

Another example of tearing down the silos in treasury management is the relationship between the commercial and finance teams. They don’t always see eye to eye, but providing commercial teams with the FX rate they need in real-time is a good way of eliminating that silo mentality.

As consultants from McKinsey said, the early adopters who drive cross-functional teamwork are going to reap the benefits and see a great increase in annual revenue growth.

Technology to optimize your currency management

Now that you know where to focus on improving your currency management, consider what tools could streamline this. But don’t forget to analyse if the current process is hurting you more before implementing new technology. Consider what areas of your FX workflow need revamping.

TMS lack visibility

One of the main pain points for CFOs is not having access to real-time data and dashboards that reflect the current state of the company’s financials. This makes it more difficult for them to make the right decisions on time.

There are tools, like the TMS, that are used in the treasury function with the objective of getting summarized information and reports but they are not properly fit for decision making at the C-level.

They lack dashboards fed with real-time data that would make it easier or facilitate the communication between Treasury and the C-suite. TMS have a few other shortcomings when it comes to currency management.

“Often a CFO is a car driver who does not see his/her dashboard immediately but with delay” – François Masquelier

When pricing with an FX rate, using the forward rate instead of the spot rate can help companies in certain situations improve their competitive position without hurting their budgeted profit margins.

But most TMS lack a strong FX rate feeder, meaning the possibility of providing commercial teams with the appropriate rate -a spot, or the two-month or the six-month forward rate, the pricing markups for a client segment-

Another problem with TMS is that the functionalities in the report are standard and not really customer variables. They are more of like pret-a-porter solution.

When we talk about the reporting and development of specific functionality, treasurers must find a way to fulfil these gaps and find the missing pieces.

This means that in the pre-trade phase of the FX workflow, TMS is not covering the needs of treasurers and CFOs.

AI, the future of treasury?

ChatGPT is all the rage right now, AI or artificial intelligence is making a comeback. But is it going to be the future in terms of treasury management and cashflow forecasting?

AI could play a role in the future of treasury management. However, we are still in the early days and there are many other ways CFOs and treasurers can start the digitization of the treasury function before resorting to AI.

There are some things that need to change in the way treasury is done and the approach of many finance professionals to the treasury tech stack. Those in charge of managing currencies need to be comfortable with their IT skills to make good use of new technology.

Another hurdle to the implementation of AI in treasury is the lack of access to comprehensive and immediate data. And finally, the inefficiency of highly manual processes when relying on spreadsheets for currency management. All of this takes away from producing accurate cashflow forecasts on foreign currencies.

Moving forward

As we have seen, there are many challenges to currency management that CFOs and treasurers will need to be well prepared for this year.

As interest rate differentials rise and the volatility in FX markets continues, there needs to be a good currency management system to handle the FX risk.

With the help of automation tools, finance professionals will be able to eliminate the silos that hinder the company’s growth and increase visibility over open exposure.

Download now our Currency Management Priorities for 2023 report to learn more about upcoming focus for treasurers and get your currency management strategy ready.

LIVE SESSION | Unlock the Benefits of Interim Treasury Management

14-02-2023  treasuryXL | Treasurer Search | LinkedIn

 

Join us for a thought-provoking Live Session on Interim Treasury Management, where our experts will delve into the pros and cons of this exciting market.

Unlock the Benefits of Interim Treasury Management: Discover Why it’s a Must-Have for Your Business!

 

 

Our panel of seasoned interim treasurers, including Emiel van Maris, Francois De Witte, and treasury recruiter Pieter de Kiewit, will share their valuable insights and experiences.

This webinar is designed for aspiring interim managers, potential clients, and anyone interested in learning more about this market.

Don’t miss this opportunity to gain tips and tricks from the experts in the field and engage in an open discussion.

Register now to secure your spot!

 

REGISTER HERE

 

Everyone is welcome to this webinar.

🌟Moderator: Pieter de Kiewit of Treasurer Search

🌟Duration: 45 minutes

 

𝘉𝘺 𝘳𝘦𝘨𝘪𝘴𝘵𝘦𝘳𝘪𝘯𝘨 𝘺𝘰𝘶 𝘤𝘰𝘯𝘴𝘦𝘯𝘵 𝘵𝘰 𝘳𝘦𝘤𝘦𝘪𝘷𝘪𝘯𝘨 𝘤𝘰𝘮𝘮𝘶𝘯𝘪𝘤𝘢𝘵𝘪𝘰𝘯𝘴 𝘧𝘳𝘰𝘮 𝘵𝘳𝘦𝘢𝘴𝘶𝘳𝘺𝘟𝘓 𝘳𝘦𝘨𝘢𝘳𝘥𝘪𝘯𝘨 𝘵𝘩𝘦 𝘭𝘢𝘵𝘦𝘴𝘵 𝘵𝘳𝘦𝘢𝘴𝘶𝘳𝘺 𝘪𝘯𝘴𝘪𝘨𝘩𝘵𝘴. 𝘠𝘰𝘶 𝘮𝘢𝘺 𝘸𝘪𝘵𝘩𝘥𝘳𝘢𝘸 𝘢𝘯𝘺𝘵𝘪𝘮𝘦. 𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘧𝘦𝘳 𝘵𝘰 𝘰𝘶𝘳 𝘗𝘳𝘪𝘷𝘢𝘤𝘺 𝘗𝘰𝘭𝘪𝘤𝘺.

We can’t wait to welcome!

Best regards,

 

 

Kendra Keydeniers

Director, Community & Partners

 

 

 

 

What is a successful Currency Management Strategy?

09-02-2023 | The year’s second edition features a discussion on the newest treasuryXL poll results, including a review of treasurer voting patterns and expert perspectives on effective currency management.

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How to mitigate credit risk

09-02-2023 | treasuryXL | Kantox | LinkedIn |

When managing foreign currencies there is an underlying FX risk that Treasurers may not see, the credit risk. In this week’s episode of CurrencyCast, Agustin Mackinlay explains how to mitigate this risk.

Disclaimer: This information is being shared for informational purposes only and was originally published by Kantox (Source)

Embrace currencies to protect your capital, maintain your cash flow, secure your earnings and access better financing! Let’s find out how to mitigate the consequences of the underlying FX risk, the credit risk.

When working with foreign currencies, CFOs and treasurers have the mission to try to reduce the FX risk as much as they can. But there is an underlying currency risk that they could be missing, credit risk.

In this week’s episode of CurrencyCast, we shared the secrets to mitigating credit risk by embracing currencies. Now, we will explain in detail what are the key actions that involve eliminating this risk.

Understanding credit risk in currency management

There is an underlying currency risk that you are probably not seeing and could eliminate easily just by following a simple rule in your currency management strategy, embracing currencies.

This is the credit risk or, more precisely, the risk in account receivables when customers need to settle their bills in a different currency than their own.

Why embracing currencies is the secret to tackle credit risk

What do we mean by embracing currencies? There are many benefits that treasurers and CFOs can gain from implementing a multi currency approach to their FX strategy.

Some of them include the ability to price more competitively or boost your company’s profit margins just by operating with multiple currencies. But there is one which is helping companies drastically reduce currency risk, by uncovering the underlying credit risk.

We’ll reveal the advantages of taking ownership of the underlying FX risk so that you can expand your business with full confidence.

Uncovering the underlying credit risk 

If you are selling in Emerging Markets like Brazil or Turkey but using only one currency like EUR or USD, you might be tempted to think that you have solved the currency risk problem.

But that’s an illusion: the underlying currency risk is still very much there. By urging customers to use a currency that is foreign to them, you are in effect transferring that risk onto their shoulders.

In the event of a sharp devaluation of the local currency, they might feel inclined to wait for a better exchange before settling their bills. In other words, your customers would speculate in FX markets with your firm’s money.

We’ve seen that phenomenon at play after the pandemic, both in Latin America and Eastern Europe. As a treasurer or CFO, you don’t want to be in that position.

Taking ownership of the underlying FX risk

In order to avoid your client’s FX risk from turning into your own credit risk, the solution is to sell in the currency of your customers while taking care of the underlying FX risk. Needless to say, this presupposes a strong, automated currency cash flow hedging program.

Such programs include: hedging firm sales/purchase orders as they materialise, hedging forecasted exposures for one or more campaign/budget periods, or a combination of these, with tools that provide visibility over the exposure throughout.

Advantages of owning the currency risk

Now you know the importance of seeing there is another added layer to your currency risk that you could be missing. It is time to consider the advantages that would flow from taking full ownership of the underlying currency risk:

  • Capitalprotection. You are protecting your firm’s capital against catastrophic loss while managing reputational risk at the same time
  • Cost of capital. You are reducing the cost of trade credit insurance if you use it, slashing lousy debt reserves and freeing up capital
  • Performance. You are securing company earnings while maintaining cash flow
  • Commercialexpansion. You are in a position to expand sales with confidence, gaining market share and/or targeting new customers

Finding a solution to mitigate the risk efficiently

After uncovering the underlying FX risk, you need a solution to mitigate the credit risk.

A currency management automation solution could be the answer for companies that want to embrace currencies. This type of tool can streamline your currency management strategy and automate your entire FX workflow to reduce FX risk, including the ‘hidden’ credit risk.

 

As we mentioned before in this episode of CurrencyCast, we live in a multi-currency world where businesses can take advantage of the profit margin-enhancing benefits of selling in many currencies, like monetising existing FX markups or driving high-margin sales to company websites.

Thanks to automation, these advantages far outweigh the perceived inconveniences and costs of managing the underlying FX risk. And, in the current scenario of uncertainty, you get an additional and very attractive bonus: less credit risk in your commercial operations. That’s quite a lot!