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2022: A new start?
21-12-2021 | treasuryXL | Cashforce | LinkedIn
Nicolas Christiaen of Cashforce looks ahead to a year of challenge and opportunity for treasury.
If there is one constant in business, it’s the fact that change will always happen – whether we like it or not. And the past half decade has seen more transformative disruption than much of the previous half century. Markets, models, economies – all have seen seismic shifts. And that’s before we were hit with a global pandemic.
It doesn’t take a soothsayer to predict that the coming year promises to throw up a whole new set of challenges for treasurers across the UK. How they address those challenges may determine how well positioned their businesses are to capitalise on the eventual recovery.
Clearly, the volatility that has characterised the previous two years isn’t going anywhere. What we have seen is that, while many treasurers and their teams have adapted to the new world we are now living in, COVID-19 is not over yet and there is a constant flow of new variables. COVID variants emerge periodically, and the different approaches to containing the virus will continue to cause volatility in the markets.
It’s fair to say that the treasury teams most likely to prosper in the coming year will be those that have not only demonstrated operational transformation or transactional excellence, but those that have also focused on continual improvement and the nuts and bolts of treasury activities – whether that means reviewing risk management processes or implementing new technology.
There’s little doubt that there remains the potential for further disruptions in global supply chains, which will inevitably bolster the demand for more visibility into cash. So, what will that mean for treasurers? From the conversations we’ve had with our clients across a range of sectors, our belief is that scenario analysis will continue to be top of mind for treasury teams over the next 12 months as new macroeconomic variables drive the need for multiple forecasts.
Technology for treasurers
The key to surviving the uncertainty will be to adopt technology that fits acute needs within a treasury’s view and then to implement it. On the adoption side, it amazes us that in 2021 we still see critical treasury processes and information housed in spreadsheets.
The good news is that the funds available for ‘Office of the CFO’ software as a service solutions (including cash management, treasury and forecasting solutions) have increased and are still growing. Even better is that ‘best-of-breed’ solutions, which typically have lower barriers of entry, are surging, as the ‘one-size-fits-all’ type of solution is shown to be excellent in some areas but simply not viable in others.
Finally, it is also worth noting that the longer we have to live with COVID-19, the more normal it will become to acquire technology in front of a computer screen (rather than meeting face to face).
On the implementation side, internal IT processes and architecture alignments are still a roadblock to implementing even niche solutions. The reason is simple: there is not enough IT capacity, due to a general lack of IT skills in the marketplace. A war for IT resources results in increased internal costs and pushes out project time frames. Digital transformation programs, while beneficial in the long term, seem to guarantee that business users of technology won’t realise tangible benefits for many months. Therefore, more focus should be put on quick wins or proof of concepts and building further from there.
While there are certainly challenges to adopting and implementing technology effectively, the need for visibility (and the automation to support scaling that visibility up), security, validation and auditing has not decreased. We feel that the above will continue to drive conversations with treasury technology providers.
Ultimately, treasurers occupy a unique position: they are, in many ways, the first line of defence in protecting businesses from the headwinds that can buffet them in stormy times. We firmly believe that by adopting the right approach to technology investment, they will continue to play their vital role.
Nicolas Christiaen
Managing Partner at Cashforce
Tame the ghost! Cancellations & currency management in Travel
20-12-2021 | treasuryXL | Kantox | LinkedIn |
How to automate the FX treatment of cancellations
It is no secret that the wave of cancellations following Covid-imposed travel restrictions has been a nightmare for travellers, airlines, hotel chains and tour operators alike. In the United States alone, cancelled domestic flights peaked at 137 thousand in April 2021. Largely due to cancellations, air traffic in Europe in 2021 was barely equivalent to 43% of the level seen before the pandemic.
Given the amount of time and resources devoted to adjusting their refunding policies, many players in the industry are still scared by the ghost of cancellations. But is that fear warranted? Not when it comes to FX management. This is because Currency Management Automation gives travel companies the tools to minimise the P&L impact of cancellations.
When it comes to FX management, the message is crystal clear: the ghost can be tamed.
Cancellations and FX exposure
FX risk management is a process in three phases: the pre-trade, the trade and the post-trade phase. Cancellations are an important element of the pre-trade phase, when the exposure to currency risk is collected and processed. Now, the type of exposure and the way it is managed depends, crucially, on each business’ pricing dynamics (see: “The hidden secret behind the different types of FX exposure”).
In the Travel world, dynamic prices are the norm (see: Currency Management Automation in Travel Distribution). OTAs, Bed banks, Hotel chains, DMCs and others frequently update their FX-denominated prices, and their cash flows are at risk from the moment of the bookings till settlement. For this reason, most Travel distribution firms apply micro-hedging programs that take those ‘firm commitments’ as the key FX exposure item.
This is where cancellations kick in. A cancelled FX-denominated booking diminishes the exposure to currency risk if the corresponding hedge has not been executed, or if an already executed trade is closed out at the same FX rate. Otherwise, there would be a situation of over-hedging. Manually adjusting hundreds or thousands of individual pieces of exposure to their corresponding hedges can quickly become an impossibly complicated task.
Taming the ghost in FX-related cancellations
Currency Management Automation provides treasurers with a number of tools to tame the ghost of cancellations. The first line of defence is to include —as part of business rules defined in the process of FX automation— an automatic cancellation rate. For example, if managers set an average cancellation rate of 10%, Kantox Dynamic Hedging® will hedge the remaining 90% hedge of the bookings.
As more information becomes available, this cancellation rate can be refined and adjusted by management when it so desires. While it is good practice to try and anticipate events, perfect accuracy cannot be expected in matters related to travel cancellations, especially in the current situation. This is why a second line of defence is provided by what our FX automation software takes as ‘negative entries’, a more efficient way to deal with cancellations. Let us briefly see how that works.
An entry is an individual piece of exposure. As part of the implementation phase of the software, risk managers establish a set of business rules that include —for each currency pair— the accumulated value of the entries they wish to hedge. These instructions also include a rule for setting negative entries from their own ERP, Booking Engine or Data Lake in the event of cancellations. API-transmitted negative entries automatically cancel the corresponding FX exposure.
But what happens when a negative entry is pushed after the corresponding hedge has been executed? Not much. Because travel-related FX exposure typically includes hundreds/thousands of individual transactions, new positions are constantly entered for the same currency pair and value date. The more granular the information included in these entries, the more accurate the FX hedging process, and the better the traceability of each piece of exposure.
Conclusion: speed is the name of the game
As the effects of the global pandemic still loom large, the ability to quickly process cancellations is a must for airlines, hotel chains and wholesalers in general. FX management is an integral part of this process — and it relies mostly on automated micro-hedging programs for bookings or ‘firm commitments”.
These micro-hedging programs, in turn, automatically treat cancellations as a key element of the ‘pre-trade’ phase of exposure management. If your aim is to tame the ghost of cancellations —while relieving the finance team from performing repetitive, resource-consuming and potentially risky manual tasks—, FX automation is the starting point.
The time to act is now!
Foreign Exchange Hedging – Putting More Flow into Your Cashflow
16-12-2021 | Xe | treasuryXL | LinkedIn |
Volatility in the market creates hedging opportunities. You can more accurately forecast margins, and have peace of mind knowing your costs won’t increase.
Any business that imports or exports goods or services have a foreign exchange requirement. Depending on how large the volume of their orders and/or sales, foreign exchange can significantly impact gross margins and has the ability to derail profit.
Importing costs fluctuate with the value of the local currency – for example, the New Zealand dollar (NZD). In the past 5 years, the NZD has moved by an average of 8% per year. In that same timeframe, if your suppliers either increased or decreased their prices by this amount, most people would do everything possible to try and mitigate the downside. This is a primary value-add of foreign exchange traders and brokerages that have the best interests of their clients in mind.
How to hedge
Volatility in the market creates hedging opportunities. By hedging, you are able to more accurately forecast margins, and have peace of mind knowing your costs won’t increase. This allows you to focus on your core business functions, be they manufacturing, distribution, or otherwise.
A forward exchange contract (FEC) allows you to buy or sell a defined amount of foreign currency on a given date in the future at a defined rate. The disadvantage of an FEC is that you may miss out on favourable market movements. However, since consistently accurate crystal balls aren’t standard issue for any ForEx advisor, the hard part is knowing where the market will go.
Experience, expertise, and depth of information resources are two of the differentiating factors between XE and our competitors.
What stops hedging?
Hedging challenges arise when your forecasts aren’t reliable, and you receive inaccurate information from sales or production advisors. Or perhaps you are running a lean supply-chain and don’t want to commit tying up cash flow to an FEC.
You can incorporate hedging into your budgeting to ensure your costed rates are covered. This prevents a situation where the currency is lower than what you’ve budgeted, and potentially a loss is being made each time you purchase FX.
For exporters, there is even less appetite to hedge. This is partly because the NZD has been strong over the past 5 years against most currencies.
The importance of interest rates
Every country wants their currency lower to attain more from exports. You will hear New Zealand’s Reserve Bank (RBNZ) say they want the currency lower. In their view, having the NZD/USD rate at 65c instead of 75c is a major positive. This isn’t what importers want to hear, but it’s the reality of the foreign exchange markets.
Interest rates dictate currency movements. The RBNZ pays particular attention to inflation, wages, GDP and employment data to make their decisions. But, the NZD is at the mercy of international reserve banks, including the US Federal Reserve and the ECB (European Central Bank).
Conclusion
Volatility is here to stay. Big swings in the market will persist. It’s almost impossible to predict where the markets will move. Yet XE has the people, processes and technology to give your business the best odds of success.
It’s unfair to judge yourself on attaining the very best rate when hedging foreign exchange. Our mantra is to empower businesses to compete to their full potential in international markets.
XE works with over 6,000 clients throughout New Zealand, and several thousand more around the world to help manage foreign exchange requirements to minimise fluctuations on margins. It would be our pleasure to advise you on how to mitigate the impact of currency on your business’ cash flow.