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CFO Perspectives: 3 ways CFOs can use currencies to boost their business’s value
05-07-2022 | treasuryXL | Kantox | LinkedIn |
As a CFO, you are aware of the benefits of FX hedging for treasury. However, are you also aware of the macro-level advantages for your company and its value?
A new CurrencyCast series has just been introduced by Kantox. They examine five ways that efficient currency management may benefit your entire business in the first episode of their CFO Edition miniseries, including how to incorporate it into your strategy and how to decrease cash flow fluctuation. Watch below the video or read the corresponding blog.
Credits: Kantox
Source
In the first edition of CFO Perspectives, we’ll draw from our work with CFOs to explore three ways senior finance executives can make currency management a winning growth and cost-saving strategy for their business.
Looking at the concerns expressed by CFOs in most risk management surveys, a number of familiar themes seem to reoccur: the importance of cash flow forecasting and monitoring, the centrality of FX risk management and the ongoing digitisation of treasury processes
Yet, this picture is far from complete.
Ultimately, among the tasks assigned to CFOs, there is the need to make a contribution toward enhancing the value of the business. But what is the role —if any— played by currency management in that regard? Answering this question allows us to single out three strategic contributions of currency management that CFOs should prioritise.
Value and FX hedging: time for a reassessment
Does currency management create value? The traditional view has been ambivalent: a ‘glass half full, half empty’ kind of appraisal. While the benefits of hedging FX have never been in dispute, the problem lies with the perceived high costs of currency management.
This is precisely where things are changing—and quite fast. Digital, API-based technology is putting to rest the notion that currency management is always a costly, resource-intensive task. Meanwhile, Multi-Dealer Platforms (MDPs) such as 360T, embedded in these solutions, sharply reduce trading costs.
CFOs: three strategic contributions of currency management
(1) Create opportunities for growth
Feeling concerned about exchange rate risk, managers may neglect the growth opportunities that come from ‘embracing currencies’. Buying and selling in more currencies allow firms to capture FX markups on the selling side while avoiding markups on the contracting side. Two examples will suffice:
(a) On the selling side: In e-commerce setups, currencies can be leveraged to increase direct, high-margin sales on company websites with many payment methods. Multi-currency pricing is the secret weapon for reducing cart abandonment, which still stands at about 77% globally.
(b) On the buying side: Buying in the currency of their suppliers allows firms to (1) Avoid inflated prices charged by suppliers who seek to manage their own FX risk; (2) Widen the range of potential suppliers by putting them in competition; (3) Obtain extended paying terms.
By taking FX risk out of the picture, currency management enables firms to reap these and other margin-boosting benefits of using more currencies in their day-to-day business operations. Ultimately, it is about removing the disincentives that prevent firms from ‘embracing currencies’.
(2) Provide more informative financial statements
Informative financial statements allow investors to assess the quality of management by removing noise from the process. To the extent that the variability in net income is perceived as a measure of management quality, effective currency hedging creates a sense of discipline in the eyes of investors.
The good news for CFOs is that technology is making great strides in cost-effectively managing the accounting-related aspects of currency management. Here are two examples:
(3) Lower the cost of capital
Companies can reduce cash flow variability thanks to a family of automated hedging programs and combinations of hedging programs, including layered hedging programs that make it possible to maintain steady prices in the face of adverse currency fluctuations.
In challenging times, when the availability of external financing at a reasonable cost is scarce —an all too common occurrence in years of pandemics and wars—reduced cash flow variability makes it possible for companies to execute their business plans and meet all cash commitments.
An impaired capacity to raise financing has implications in terms of valuation, especially for smaller businesses. This ‘cost’ has been variously measured, with some estimations ranging from 20% to 40% of firm value. Currency management enhances the capacity to raise finance and, by extension, lowers the cost of capital and boosts firm valuation.
A wide range of opportunities to create value
We have singled out three major contributions of currency management in terms of creating value for the business: (1) stimulating growth while protecting and enhancing profit margins; (2) lowering the variability of cash flows; (3) presenting more informative financial statements. We can mention even more benefits:
While most of these advantages have been known by CFOs for many years, there is a new factor to consider: they can be implemented with Currency Management Automation solutions that remove most of the resource-consuming, repetitive and low-value tasks performed by the finance team, eliminating unnecessary operational risks along the way.
With an added bonus: by leveraging currencies, CFOs have the opportunity to take decisive steps in terms of digitisation. According to a recent HSBC survey, digitisation is seen as the most positive factor by 84% of CFOs overall, as they expect investments in digital technology to have a “positive impact on their business”, with more than half of them expecting it to give the business model “a large boost”.
The time to act is … now!
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Ask the treasuryXL expert #1 How might digital trade transactions reduce the threat of fraud and money laundering?
04-07-2022 | treasuryXL | Vincenzo Masile | LinkedIn |
treasuryXL is the community platform for everyone with a treasury question or answer!
Today, we discuss a question that treasuryXL expert Vincenzo Masile often gets to hear within his treasury network about digital trade finance.
This edition, the following question will be answered:
“How might digital trade transactions reduce the threat of fraud and money laundering?”
Vincenzo Masile
“That is a question I think is very relevant right now, especially after Covid. Firstly, let me look back at trade finance over the past few years. In 2019 and 2020, trade finance came under scrutiny following a number of high-profile defaults, suspected frauds and double financings and, in some cases, the failure to provide proper collateral for goods.
While legislation to recognize electronic trade documents will not bring about an overnight change in financier confidence, it is likely to do so in the medium term.
A game-changer for digital trade
The availability of fully enforceable electronic trade documents recognized by the most widely used trade jurisdiction will in itself have a major impact on the approach of both companies and financiers towards digital trading solutions.
Transferable records, such as bills of lading, are the most important commercial documents in trade and currently, less than 1% of bills of lading are in electronic form. This is a huge missed opportunity, given that electronic transferable records will make trade safer, paperless, easier, cheaper, faster, and greener for companies.
Implications for the security in trade transactions and regulatory treatment of trade finance: URDTT
The Uniform Rules for Digital Trade Transactions (URDTT) version 1.0 are the result of the mandate given by the ICC (International Chamber of Commerce, Paris) Banking Commission to develop a high-level structure of rules, obligations, and standards for the digitalization of trade transactions.
The ICC Uniform Rules for Digital Trade Transactions (URDTT) are intended:
1. For a fully digital environment;
2. To be neutral with regard to technology and messaging standards; and,
3. To extend into the corporate space, including commercial transactions and the growing community of non-bank providers of financial services.
The URDTT are designed to be compatible with UNCITRAL (United Nations Commission on International Trade Law) Model Laws, including those Electronic Commerce, Electronic Signatures and Electronic Transferable Records.
The rules will serve as an overarching framework for digital trade transactions thereby providing global standardization, consistency and conformity, providing a collective understanding of terms and definitions, whilst promoting and supporting the usage of electronic records/documents/data.
Various technology service providers have already publicly stated their intention to work with the URDTT, in fact, a number have already incorporated the URDTT into their platform rulebooks and are actively looking at developing trade products based upon the URDTT.
Conclusions
Trade finance functions that adopt appropriately targeted automation and advanced analytics as integral parts of their compliance operations will be more important than ever in this uncertain international environment. With such high volumes of transactions and increasing complexity, efficient trade financing is key to ensuring that warehouses, harbors and supply chains are running smoothly – thus keeping the age-old business of international trade firmly afloat.”
Do you also have a treasury-related question? Feel free to leave your question on our treasuryXL Panel. The panel members are willing to answer your question, free of charge, with no commitment.
marcus evans | 3rd Edition Commodity Markets Modelling, Analytics & Risk Management | 12-14 September | London
30-06-2022 | treasuryXL | marcus evans | LinkedIn |
We are proud to announce our media partnership with marcus evans group for the 3rd Edition Commodity Markets Modelling, Analytics & Risk Management conference taking place in London on 12-14 September 2022.
London, UK
12 – 14 September, 2022 | 08:30 BST
There are many challenges involved with Commodity Markets Modelling. A major one at the moment is the volatility within the energy markets, specifically the spike in the price of energy including gas throughout the European and world markets. Another challenge which has been there for slightly longer is the generating and accessing of quality data which can feed modelling, in particular AI and machine learning models. There also exists a specific challenge around the modelling of renewables which has become an area of increased interest over the last few years. Finally, there is always a push to have new techniques which can help to improve the performance of trading teams in a very competitive market.
With this in mind, the marcus evans 3rd edition Commodity Markets Modelling, Analytics & Risk Management conference held between 12-14 September, 2022 in London, UK will provide the much-needed techniques on optimising modelling and trading within commodity markets. The event will deliver attendees tailored sessions on accessing the best data types to assist accurate modelling and forecasting. Practical solutions will be delivered regarding battery storage and modelling of intermittent weather sources such as wind and solar energy. Finally, new innovation tools which can assist traders and decision makers in commodity markets spaces will be explored and evaluated.
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