5 Reasons to Automate your Cash Forecasting in 2023

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01-02-2023 | treasuryXL | CashAnalytics | LinkedIn |

If you and your team are grinding the gears on a monster cash flow model and are considering moving to an automated solution, here are five reasons to make the switch in early 2023.

By Conor Deegan

1. Better manage the uncertain economic climate

Perhaps the biggest benefit of cash forecasting automation is that it will allow you to better predict and manage future surprises. The triple whammy of slower growth, high inflation and rising interest rates has led to considerable uncertainty that will last for the majority of 2023 and beyond. Layer in the inevitable unknowns and you have an environment where a firm handle on cash flow is critically important.

Automation will give you the cash flow data you need to manage the road ahead in a streamlined and reliable manner.

2. Manage an increased focus on cash

As a result of the changing economic environment and the expected impact on the cash flow of many businesses, you and your team will likely receive a lot more requests for cash flow reporting and insights into cash flow, including forecasts, from your senior stakeholders as they too focus more on cash flow.

Automated cash forecasting and reporting will allow you to respond faster and more efficiently to these new demands while reducing the admin burden on your team significantly.

3. Repay expensive debt faster

Banks have quickly passed on the recent interest rate increases by the US Federal Reserve and other central banks around the world to their corporate customers in the form of higher loan interest rates. As deposit rates have yet to see the same increase, there is a need for any company with revolving or short-term debt to use excess cash flow to keep debt levels at a minimum. If they don’t, they will suffer the pincer movement of higher borrowing costs and the reduced value of cash holdings which will have a major impact on the profitability of the business.

Optimising cash and debt levels, with the goal of reducing interest costs while ensuring the business has enough liquidity to function day-to-day, requires a tight handle on cash and robust visibility over current and future cash flow. Without a high level of cash forecasting and reporting automation, you won’t have access to reliable detailed cash flow visibility you need to make these debt repayment decisions with confidence.

4. Keep your team happy

The reality is no one wants to spend most of their time manually slogging away with spreadsheets daily. Cash flow spreadsheets can be some of the largest and most complex managed by any finance team due to the number of inputs and volume of data required to create meaningful cash flow forecasts.

While economic conditions have deteriorated, the labour market also remains very tight. Retention of staff remains a top priority for CFOs who understand the upfront cost and ongoing investment needed to make new hires productive and keep them happy. Investing in automation is a great way to show your team that you are committed to both innovation and helping them to do their job, the best way they can.

5. Focus on strategic priorities

In line with the above point, automation of manual cash reporting and forecasting will allow you to focus on more strategic objectives such as supporting the growth of your business and planning longer term capital requirements.

It’s impossible to properly focus on strategic issues when you’re weighed down by the grind of manual work. If you or your team spend 80% of time on manual spreadsheet-based cash flow reporting and forecasting tasks and only 20% on analysis and strategic planning, you can flip this on its head with an automated forecasting solution to instead spend most of your time on higher value tasks.

Summary of Automation Benefits

In summary, cash forecasting automation will allow you to:

  1. Produce cash flow forecasts, reporting and analytics much faster
  2. Produce more accurate forecasts that improve over time
  3. Carry out detailed drill down and analysis
  4. Reduce manual error, improving overall forecast quality
  5. Save time to focus on forward looking planning

The net result of automation is that you will produce a higher quality forecast, in a fraction of the time which will give you clearer and more reliable visibility over future cash flow.

Ready to make the change?

Here in CashAnalytics we specialise in helping companies transition from manual, time consuming spread sheet-based cash reporting and forecasting processes to a highly automated system-based approach. We are experts in cash forecasting and cash management and write extensively on the subject. The follow resources may help you as you consider next steps.

5 Treasury Trends for 2023: Managing Currencies in an Age of Uncertainty

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26-01-2023 | treasuryXL | Kantox | LinkedIn |

Scared about 2023 looking even worse than the crazy last three years? Keep calm and take a holistic approach to currency management. 

Source: Kantox

If we look back at the economic landscape of last year, treasurers and CFOs have been dealing with risky scenarios for a while. But is the future as dark as some say? Our latest episode of CurrencyCast featured the treasury trends for 2023. In this article, we will take a deep dive into those trends and give you some tips on how to tackle the challenges in this volatile landscape.

Treasury trends for 2023

Consultants and pundits are busy laying out scary scenarios for 2023. However, the future is uncertain so let’s not waste time in futurology trying to predict what’s coming.

Instead, we can focus on understanding the treasury trends of 2023. In this article, we’ll analyse those trends with a focus on currency management and give you actionable tips on how to handle any hurdles ahead.

CFOs and corporate treasurers need to be well prepared for the upcoming challenges and opportunities as they manage currencies. The top five priorities in the corporate treasury space for 2023 are:

  1. FX volatility
  2. Shifting interest rate differentials
  3. Liquidity management
  4. Cash flow visibility
  5. Automation

FX volatility

In the past year, the financial markets have seen high levels of FX volatility and an unstable economy that seems to point towards a recession. Trends of high inflation, banks’ rising interest rates, political instability, and more will remain in the new year.

Hence why, it is fair to say that currency managers need to be well-prepared to face interrelated risks affecting FX rates. Companies dealing with foreign currencies will have difficulties accurately forecasting cash flows.

However, there is no reason to panic yet. There are a few strategies that corporate finance professionals can implement to tackle FX volatility; we will explain them later.

Shifting interest rate differentials

Shifting interest rate differentials are a likely scenario in 2023 as central banks act to tame inflation, each at its own pace. The good news is that companies can optimise such interest rate differentials across the entire FX workflow. Here are a couple of examples:

– With favourable forward points, pricing with the forward rate improves the firm’s competitive position without hurting budgeted profit margins.

– With unfavourable forward points, pricing with the forward rate helps managers avoid losses on carry and the temptation of excessive pricing markups.

– Finally, the cost of hedging can be lowered by delaying hedging execution with the help of automated conditional FX orders.

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Liquidity management

In addition, the current emphasis on strong liquidity management will persist well into 2023. Liquidity management allows the treasury team to have a wider view of the company’s resources and be financially agile.

This will give any treasury professional the required accurate insights on the cash projections. And ultimately, help the business be prepared for potential liquidity risks that may arise.

Cash flow visibility

Avoiding less-than-stellar cash flow visibility will be top of mind for treasurers in 2023. As economic cycles could be disrupted again, companies need to be able to get ahead of the curve and reduce deviations in their cash flow projections.

However, we believe that the importance of having accurate cash flow forecasts is somewhat overstated, at least when it comes to currency risk management.

To understand why this is so, the treasury team should consider how the different cash flow hedging programs deal with this concern:

– In firms with dynamic prices, forecasting accuracy is not much of a concern because firm sales/purchase orders have a very high occurrence probability.

– In firms with steady prices across several campaign/budget periods, layered hedging programs build the hedge rate in advance instead of protecting an FX rate.

– In firms with steady prices for a single campaign/budget period, conditional orders to protect the budget rate provide managers with time to update their forecasts.

For better cash flow visibility in the new year, companies will need to consider their ability to implement hedging programs that best suit their needs.

Automation

In 2023, the role of the corporate treasurer will require professionals to improve their technological skills. The traditional treasury function is shifting towards an automated digital infrastructure that enables increased efficiency and faster processes.

To manage currency risk in the new year, treasurers will need to move away from siloed systems and wasting time on manual tasks. Instead, they need to look for a solution that is able to automate the entire FX workflow.

Tools that are able to connect, via APIs, to their treasury management system and other data sources, for updated reports that give accurate insights into their FX exposure.

Facing the challenges

Now you know the treasury trends that will be dominating 2023 for corporate treasurers. But we also want to give you some tips on how currency managers should act in the face of such challenges.

As we like to emphasise at Kantox, currency management is much more than currency risk management. And currency risk management, in turn, is more than just the act of executing a hedge. Let us see this in more detail.

Consider the case of automated conditional orders to protect a budget rate. To the extent that the underlying levels are not hit, no trades are executed. Yet, you are still actively managing your firm’s exposure to currency risk.

Delaying hedges may lead to netting opportunities that ultimately result in less, not more, hedging transactions. The results are:

  • Less trading costs
  • Savings on the carry in the event of unfavourable forward points
  • Less cash immediately set aside for collateral requirements

The right approach for 2023

Pundits predicting a catastrophic 2023 may turn out to be right. Then again, they might not. In any case, the priority for currency managers is to take a holistic view of currency management that allows them to:

  • Embrace the entire FX workflow
  • Avoid silos and have commercial and finance teams work hand in hand
  • Take advantage of the profit margin-enhancing opportunities offered by currencies

As you have seen, corporate treasurers will need to be well-prepared for all the interrelated risks of the turbulent economic landscape. With the help of the right automation tools, the treasury function can have a strong currency management strategy that helps them storm the weather outside.

Kantox is the currency management automation solution that covers the entire FX workflow so you can improve your profit margins and leverage foreign currencies.

Book a free strategy session with our currency management specialists to learn more.

What is possible in Complex Countries for Treasury?

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26-01-2023 | treasuryXL | ComplexCountries | LinkedIn |

ComplexCountries reports detail how corporate treasurers approach challenges in complex countries, across associated treasury processes and how they adapt to economic and regulatory changes.

Their reports cover a wide range of topics associated with treasury processes in these countries, and how they are impacted by economic and regulatory changes. This includes how corporate treasurers approach currency risk management, compliance with local regulations, and maintaining cash and liquidity in the face of political and economic instability. The goal is to help treasurers navigate these challenges and protect their company’s financial position.

Find below some of the free reports detailing complex country challenges for treasurers

Find here all reports

 

Want access to all reports?

Please log in on the website of ComplexCountries. Or contact ComplexCountries to find out about their subscription packages.

Six Tips to Protect Your Organization Against Payments Fraud

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25-01-2023 | treasuryXL | Kyriba | LinkedIn |

By Bea Saldivar, Global Payment, ERP and Treasury Advisor
Andrew Deichler, Content Manager, Strategic Marketing

Source

 

The Threat of Impersonation

Payments fraud in 2021 was as bad, if not worse, than the year before, according to the 2022 AFP Payments Fraud and Control Survey. But even though business email compromise (BEC) scams dropped substantially last year, many organizations are still falling prey to them and incurring significant losses.

At the heart of BEC scams and more recent developments like deepfake fraud is impersonation. Cybercriminals use social engineering tactics to develop profiles on company employees or routine vendors, which they then impersonate to dupe unsuspecting people into making critical mistakes.

To identify an impersonator, it’s helpful to know the telltale signs. More than likely, the payment request will be urgent and will attempt to exploit unique circumstances, such as a specific time when employees are out of the office. Additionally, if your organization is making a lot of payments to contractors for a project, fraudsters might attempt to exploit that.

For example, Philabundance, a Philadelphia food bank lost about $1 million due to a successful BEC scam. The food bank was in the process of building a $12 million community kitchen. The accounts payment (AP) team received an invoice from what they thought was a construction company supplier and made a payment.

The Government of Carrabus County, N.C., also found itself victimized by a vendor BEC scam. The county intended to send money to a contractor it had been working with for the construction of a new high school. Through a series of emails that began in late 2018, the fraudsters made requests to update bank information. The county didn’t do its due diligence and ultimately sent more than $2.5 million to the fraudulent account. While over $776,000 was ultimately recovered, about $1.7 million remains unaccounted for.

Common Fraud Myths

When it comes to payments fraud, many treasury and finance departments still get lulled into thinking they are more protected than they are. Organizations may assume that their procedures are infallible or that any lost funds will be reimbursed, but they quickly get a wake-up call when a successful attack happens. The following myths are common.

“We have an approval process in place.” Even the companies with the strictest policies in place can still have a breakdown in processes. Employee ID/password combinations can be stolen. Regional treasury/shared service centers may require fewer numbers of approvals due to limited in-country staff. And companies with multiple ERP systems might have different approval processes—a scenario that is ripe for fraud.

“My bank will cover me.” There is no obligation for a bank to cover any client for payments fraud, unless the bank itself has been breached, like in a bank employee scheme. The bank may still reimburse corporate clients on a case-by-case basis, but don’t bet on it.

“We have cyber insurance.” Many companies assume that if they purchase cyber insurance, that they are covered in the event of a loss. However, if an organization can’t prove that it took all the right steps to protect itself, it’s very likely that the insurance policy won’t cover the loss. Many plans don’t cover BEC scams, for example, because they involve an employee making an error. There have been several legal cases where insurance firms have refused payment and the courts sided with the insurers. Furthermore, even if cyber insurance does agree to pay out, you might still have to pay a high deductible. For some plans, that cost can be tens of thousands of dollars.

What Can You Do?

Fortunately, there are many ways to protect your payments and your data. The following tips can help.

Embrace the cloud. Organizations should embrace cloud technology to secure payments and systems. IT teams know that payments data and connectivity are more secure when hosted externally. However, not all cloud solutions are alike. Solutions like Kyriba Enterprise Security ensure that treasury, payments, and risk data meet internal security policies and international security requirements while providing 24/7, global support.

Align all departments. Your internal IT department, as well as any key areas that touch payment processing areas such as treasury, accounts payable, shared services, etc. all should be aligned with your security policies. With more and more companies allowing remote work, companies must ensure that all employees are using effective protections such as strong passwords, policy controls, multifactor authentication, IP filtering, single sign-on and data encryption.

Automate payment processes and standardize controls. Automation allows organizations to standardize the payment journey from the initial request to the receipt of the payment. Risk lies in the exceptions to a standardized process, i.e., payments made outside of this typical format that provide fraudsters with opportunities. Again, these are usually one-time, urgent payment requests that can come in for things like mergers and acquisitions, legal settlements, emergency payroll, etc.

Enable real-time screening, alerts, and notifications. The rise of same-day and real-time payment systems has increased the need for real-time responses to fraud attempts. Modern fraud detection software uses artificial intelligence (AI) and machine learning to screen payments against historical payment data, pinpointing any anomalies.

Implement fraud prevention workflows. Modern payments fraud modules support fully automated, end-to-end workflows for the resolution of outstanding suspicious payments. Users can determine how each detected payment should be managed, enforcing the separation of duties between the initiator, approver, and reviewer of a detected payment.

Know your vendors. Vendors can be a major liability for your company. In some cases, vendors are granted access to their customer’s network credentials. If that vendor’s security protocols are lacking, they can become an unknowing backdoor into that customer’s systems. This is what happened in the infamous Target breach in 2013. Therefore, it is imperative to have a detailed information security questionnaire that can provide confidence in the governance and risk programs that a vendor has in place. Additionally, with vendor BEC scams proliferating, organizations need to make sure that requests for payment instruction changes are verified directly with the vendor before any transactions are completed.

Safeguarding Your Payments

To mitigate the risk and safeguard your payments, organizations must have a unified solution that connects ERPs, internal and external systems that allows for a secure, end-to-end payment journey. Furthermore, when exceptions occur, protocols can’t be abandoned no matter how urgent the request. Any departments that touch payments need to understand that one slip up can be catastrophic, not only leading to loss of funds, loss of job and reputational risk for the whole organization.

Kyriba is here to help you protect your organization against payments fraud. Learn more here.

How to get into FinTech? A Career Guide for 2023

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19-01-2023 | Pieter de Kiewit | treasuryXL | LinkedIn | If you are interested in learning about FinTech and how to get into the industry, there are a few things you may want to consider. With my focus on corporate treasury, we are in close contact with various Fintech companies who ask us on a regular basis to support them in their recruitment. We learned these companies have specific requirements.

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Traceability and consistency contribute to security

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18-01-2023 | Cobase | treasuryXL | LinkedIn |

The importance of secure treasury functions cannot be underestimated. Fraud prevention – including sanctions checking – has long been one of the main drivers of change in corporate payments.

Source

Similarly, treasury teams that rely on a bank connectivity partner for all their bank connections need to be sure that they work in a secure and reliable way. This is especially important for bank administration, where access to various accounts might need to be changed quickly or revoked instantly.

In the final blog in this series we look at the benefits of maintaining a complete audit trail of payment activities and the advantages to be gained from having a consistent payment approval workflow across business units.

Benefits of maintaining a complete audit trail of payment activities

For the majority of companies the answer to the question ‘Do you have a complete audit trail on your payment activities’ would be no because they are (for example) relying on calculations presented in an Excel document where there are many opportunities for data to be amended or accessed without proper authorisation. Payment details are then manually re-keyed in ERP or bank systems. And to add, also counterparty details could be changed without sufficient oversight or control.

The purpose of an audit trail is to capture the end-to-end flow of a payment covering questions such as why it was originated, the person or persons who originated it, who it was approved by, and when it was executed.

In some cases this audit will be initiated by a regulator (in the case of financial institution clients), whereas for corporates the request may come from a variety of sources including:

  • The compliance or security team as a part of a wider review of IT systems.
  • As part of an investigation into a specific payment.
  • A treasurer who wants to see who in their organisation has payment approval rights.

Advantages of having a consistent payment approval workflow

Having access to an audit trail, a one-click overview of current user access rights, and approval mandates is a useful tool for any corporate looking to increase both the security and efficiency of its treasury operations and identify where steps could be removed from the process as well as to inform decisions around centralising or localising these functions.

Treasurers need to ask themselves if they have gaps in their payment approval workflows and/or local discrepancies and whether they have a central – in other words, at the push of a button – overview of payment approval rights across their organisation.

It is also important to ensure that the organisational design and policies are in place around approvals within the accounts payable and receivables teams. Approval processes that have deviated from the norm are potential signs of bank account fraud or false invoicing.

To prevent false invoicing, a limited number of users should have the ability to create new payees, settlement instructions, and cash transfers. Eliminating manual handling of payment data removes many opportunities for fraud.

Automating manual processes in invoice handling and payment processing also adds to the transparency, quality and speed of payments. Harmonised practices increase transparency and visibility, while uniform processes help to track cash outflows across the entire organisation and thus mitigate risk of both external and internal fraud.

The ultimate guide for achieving efficient and safe multibank cash visibility and payments

Treasury teams looking to optimise their cash management processes realise that making smart decisions requires tactical and strategic planning. However, there are a number of principles that can be applied by any business to increase the level of insight into how funds move into and out of their organisation.

That’s why we created ‘The ultimate guide for achieving efficient and safe multibank cash visibility and payments’. In this guide you’ll find questions that you can ask yourself to determine your current level of efficiency and spot the areas you might need to improve.

Live Expert-Led Session | Your Currency Management Toolkit for 2023

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17-01-2023 | treasuryXL | LinkedIn | Join Kantox and treasuryXL in this expert-led conversation on the future of currency management as we uncover the key treasury priorities and opportunities for the new year.

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3 Ways Treasury Can Save Money & Boost Revenue in 2023

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17-01-2023 | treasuryXL | TIS | LinkedIn |

Now in its 2nd consecutive year, TIS is excited to release the findings from our 2023 Treasury Priorities & Opportunities Survey. Having run throughout the course of Q3-Q4 2022, our research again captured responses from hundreds of U.S. finance and treasury practitioners operating at companies of all sizes and industries. The goal was to capture their perspectives on a range of items including the ongoing adoption and use of finance and treasury technology, as well as upcoming staffing plans, strategic and operational expectations, and overall trends occurring in the space.

Source

This blog serves as a summary overview of the key results and findings from TIS’ 2023 Treasury Priorities & Opportunities Survey. To access the full results and analysis, you can download the extended whitepaper here.

  • Overall Composition of Treasury Operations
  • Treasury Staffing & Professional Development Plans
  • Treasury Technology Investment & Focus
  • Cash Forecasting Preferences & Workflows

This image provides the demographics related to TIS' recent 2023 treasury industry survey.

In total, over 250 practitioners responded to this year’s survey, which consisted of roughly 30 questions. All respondents held roles in either treasury or finance. In addition, all respondents were operating at companies with headquarters in the U.S., but most maintained an active international presence.

In terms of company size, 34% of represented companies had annual revenues of $100M – $1B, and another 34% had $1B – $10B annual revenue. 14% had revenues of over $10 billion, while 18% were under $100mm.

Regarding industry representation, construction and manufacturing firms accounted for over 27% of all respondents. Companies from the software, education, insurance, retail, and automotive sectors collectively accounted for another 40%.

In aggregate, our 2023 research initiatives are representative of an appropriately diverse spread of treasury and finance practitioners from a variety of company sizes and industries.

 

Treasury Responsibilities Increase as Staffing & Technology Investments Remain High 

The findings from our 2023 research highlighted that despite strong economic headwinds and market uncertainty, a significant number of treasury teams are still expecting to add more staff and adopt new technologies in the year ahead. In fact, while 48% of teams expected to add more staff, only 3% planned to reduce their headcount. Similarly, over 50% of respondents plan to invest in new cash management and payments-related technologies.

This should be taken as generally reassuring news for practitioners, especially given the wide-ranging budget and staffing cuts that have occurred within many U.S. companies and institutions in the past few months. However, these new technology and staffing additions are also being coupled with a new set of responsibilities and expectations from business leaders that may place greater strain on practitioners. These heightened expectations were clearly evident in our research, with 77% of practitioners indicating their list of responsibilities would increase in 2023, while just 2% believed their workload would be reduced.

Regarding the nature of these new responsibilities, it appears that many treasury teams are being relied upon to execute and contribute towards more “strategic” internal functions. Based on the data, 57% of practitioners indicated that the strategic role of their treasury group would expand in 2023, while just 4% indicated a decrease. Going a step further, when asked whether treasury was viewed as more “operational” or “strategic” by management, practitioners were evenly split in their perspectives at 48% strategic and 52% operational, respectively.

Treasury's strategic impact is projected to grow in 2023 based on recent industry survey data.

Looking deeper into the growing influence and responsibility of treasury, another interesting finding was that most treasury teams seemed to exert heavy control over their company’s AP and AR operations, either directly or indirectly. On average, 69% and 67% of treasury groups maintained some level of control over these operations, with little deviation between companies of different sizes and industries.

 

Cash Forecasting is a Top Priority for Treasury in 2023 

Although cash management and forecasting operations have long-been standard treasury responsibilities, data shows that practitioners have been placing an even greater focus on these operations over the past year.

Since early 2022, several major U.S. corporate treasury studies including AFP’s 2022 Strategic Role of Treasury Survey and Strategic Treasurer’s 2021 Treasury Perspectives Survey saw cash management, forecasting, and working capital projects ranked as top priorities for treasury teams. Our 2023 research corroborated these results with data showing cash management technology being the top priority for new software investments over the next year. In addition, cash management skillsets were listed as the most emphasized area of professional development focus for treasury teams in 2023.

Turning to cash forecasting, one primary focus of our research was learning more about the various forecasting workflows and strategies leveraged by treasury groups and companies of different sizes and industries. At a high level, we found that nearly half of survey respondents used a TMS to produce cash forecasts, with 20% leveraging an ERP and nearly 30% relying on Excel Spreadsheets. While Excel is still used predominantly by smaller teams, the use of TMS and ERP products was much more popular for companies with $500mm+ in annual revenue.

Cash forecasting trends for treasury in 2023 based on company size.

Regarding the preferred forecast horizon, 27% of teams focused on monthly forecasts, while 38% were prioritizing weekly analysis and 25% daily. Generally, smaller companies were only half as likely to conduct daily forecasts compared to larger firms, but 2x more likely to conduct quarterly forecasts. On the other hand, larger firms were more likely to conduct forecasts across numerous time periods including daily, weekly, and monthly. In aggregate, weekly forecasts were the most popular analysis period across all sizes and industries.

As a final point on forecasting and in-line with the broader digitalization shift that has been occurring in treasury for years, the top priority for practitioners when improving their forecast process revolved around either migrating away from legacy Excel-based processes or upgrading their existing software to achieve greater accuracy and automation.

To learn more about this research and for extended results and analysis, download the full whitepaper here. You can also watch our recent results webinar that features commentary on the key survey themes by a panel of industry experts.

Hedging Strategies 101: Layered Hedging

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16-01-2023 | treasuryXL | Kantox | LinkedIn |

Avoid the cliff and protect your cash flows! When volatility is at an all-time high, the right currency hedging strategy can set you apart. And save your business from an uncertain future. Transform your FX risk with a layered hedging strategy that will help you withstand unexpected changes in FX markets and protect your margins.

When implementing an FX hedging program, finance professionals responsible for risk management must be aware of the ins and outs of their business. This will be the starting point to uncover potential gaps in the hedging strategy and also opportunities to implement the program that fits perfectly.

Let’s understand how a layered hedging program works and how it could fit with your FX strategy.

Why is a layered hedging strategy important?

Layered hedging programs allow CFOs and Treasurers to handle the related problems of FX markets volatility, shifting interest rate differentials, and less-than-stellar cash flow visibility.

The goal of a layered hedging program is to smooth out the hedge rate over time to lower the variability of company cash flows. Additionally, a layered hedging program that is created from scratch can deal with the problem of forecasting accuracy.

Instead of ‘protecting’ an FX rate, layered hedging programs build the hedge rate in advance. And because hedges are applied in layers, in a progressive manner, you do not need a 100% accurate forecast at all.

Who can benefit from a layered hedging program?

Not all hedging programs are the same, as they tackle different goals for managing FX risk. Before you implement a layered hedging program and start dedicating time and resources, you need to think about certain conditions. These relate to your current business model -including pricing structure, the FX exposure you want to hedge, cash flows, etc.- and your company’s specific needs when it comes to FX hedging.

This type of hedging program is best suited for firms that need or desire to keep steady prices not only for one individual campaign/budget period, but for a set of campaign/budget periods linked together. In layered hedging:

(a) Prices are usually not FX-driven, meaning that the FX rate plays no role in pricing strategy.

(b) The impact of the ‘cliff’ -a sharp adverse fluctuation in currency rates between periods-, cannot be passed on to customers at the onset of a new period.

(c) The exposure to hedge is a rolling cash flow forecast for a set of periods linked together.

Unlike other cash flow hedging programs, like static hedging where prices are either frequently updated or updated at the onset of a new budget period, pricing does not act as a hedging mechanism in layered hedging programs. And that puts cash flows at risk, so a solution must be found elsewhere.

In comes the star of layered hedging, smoothing the rate.

Smoothing the hedge rate over time

The secret of achieving a smooth hedge rate over time is to create commonality between trade dates for a given value date. Take, for example, a 12-month layered hedging program. The value date of October is hedged in 12 different months, from October in the previous year down to September.

Next, the value date of November is hedged in the same manner, starting in November of the previous year down to October. And so on and so forth. Note that the two value dates -October and November- share eleven out of twelve trade dates with the same spot rate. That’s the concept of the mechanically created commonality that lies at the heart of layered hedging programs.

However, the process of ‘layering the hedges’ is not as simple as it may seem at first glance. There are some common challenges that Treasurers and CFOs face when manually performing FX risk management activities.

Common challenges in layered hedging

Before crafting the optimal layered hedging program for your business, there are three common challenges that need to be considered. These are crucial to the success of the FX hedging strategy. And they relate to the configuration of the program, the intrinsic constraints of the business, and the level of automation currently available to the team. Let’s take a closer look.

  • Configurations. Depending on risk managers’ secondary objectives, there are many possible configurations for a layered hedging program. Some of these configurations regard:

(1) The degree to which the hedge rate is smoothed, for example by adjusting the programs’ length.

(2) The optimisation of forward points. For example, hedge execution can be delayed if forward points are ‘unfavourable’.

(3) The distance between the average hedge rate and the spot rate.

  • Constraints. Each treasury team may face its own set of constraints, some examples include:

(1) The degree of forecast accuracy.

(2) Possible limitations imposed by liquidity providers who might not let a firm trade forward contracts that expire, say, more than two years out.

  • Automation. Needless to say, a manually executed layered hedging program can be pretty demanding, especially if many currency pairs are involved. We’ve seen companies running such programs with the help of enormous spreadsheets. This only creates two different operational risks:

(1) Spreadsheet risk, including data input errors, copy & paste errors, formatting and formula errors.

(2) Key person risk, as only a handful of individuals understand the formulas that underpin the ‘monster’ spreadsheets.

Eliminating the uncertainty

Layered hedging programs are a powerful FX risk management tool to face the trifecta of problems created by a highly volatile scenario. These hurdles include currency risk —including the risk of a cliff, as we saw recently with the GBP-USD exchange rate—, shifting interest rate differentials, and less-than-stellar cash flow visibility.

Now that you know the ins and outs of layered hedging, you can start transforming your FX risk management workflow. And forget about the challenges that may come when facing uncertainty. That’s a pretty powerful advantage in a scenario of pandemics, inflation and war!

Optimal hedging strategy with Currency Management Automation

If you want to leave behind the challenges of manual work when it comes to currency risk, consider implementing automation software.

Kantox is the only solution that streamlines the currency management process through powerful automation of the entire FX workflow. This enables businesses to reduce currency risk, protect profit margins and price more competitively.

Building a platform for success

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11-01-2023 | Cobase | treasuryXL | LinkedIn |

Banks provide solutions to connect and integrate corporate ERP systems, most of which are based upon batches of data being exchanged between the accounting platforms of the company and the bank. However, these are bank and country-specific and not a scalable solution fit for future growth or expansion.

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Also it is important to determine whether payment batches follow a consistent approval chain. Malicious activity is difficult to detect in a cumbersome and scattered ERP and bank environment so treasury teams need to have confidence that payment batches generated in the ERP system are automatically sent to the banks in the right format and in compliance with local security standards.

In the third blog in this series we explore the merits of connecting accounting systems and/or ERP systems to your bank(s) and why companies benefit from being able to execute payments from a single platform.

Merits of connecting accounting systems and/or ERP systems to your bank(s)

If the company connects its ERP system through a platform or a dedicated middleware layer, this creates a tight workflow to which consistent approvals can be applied, reducing the scope for unauthorised payments. Automatic information feeds also support the execution of sophisticated liquidity forecasting and management of foreign currency exposure.

An additional factor for corporates to consider is whether their provider will be able to move to open banking APIs once their bank(s) make them available and provide APIs to their ERP environment. Connectivity between corporate accounting software and bank portals generates a number of benefits for corporates, including the availability of balance and transaction information in real-time to enable more accurate and timely decision-making and further optimise cash and credit lines.

Multiple cash management banking relationships make managing payments and cash a cumbersome process that involves logging in and out of different bank portals and managing disparate authorisation schemes while trying to ensure that bank data and data in ERP or accounting systems are synchronised.

Most ERP systems allow for batch payments only and have no interface for individual payments, which means there is no screen where individual payments can be entered manually.

Why companies benefit from being able to execute payments from a single platform.

When treasurers are unable to send single payments out of their ERP system directly to their bank, they are required to log into individual portals to perform these payments. This can become a frustrating process when they have to look for security tokens or recall passwords that are rarely used because of the sporadic nature of the payment.

It might be tempting to assume that this is not a major issue given that these payments are not made regularly and are often of low value. However, there will be situations where high value one-off payments have to be made. Regardless of the value of the payment, it is much easier to execute it from a single platform because the user experience is the same across all banks.

In the final blog in this series we will look at the benefits of maintaining a complete audit trail of payment activities and the advantages to be gained from having a consistent payment approval workflow across business units.

The ultimate guide for achieving efficient and safe multibank cash visibility and payments

Treasury teams looking to optimise their cash management processes realise that making smart decisions requires tactical and strategic planning. However, there are a number of principles that can be applied by any business to increase the level of insight into how funds move into and out of their organisation.

That’s why we created ‘The ultimate guide for achieving efficient and safe multibank cash visibility and payments’. In this guide you’ll find questions that you can ask yourself to determine your current level of efficiency and spot the areas you might need to improve.