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Are There Risks to Conducting International Business in USD? (Part 1 of 2)
30-07-2020 | treasuryXL | XE |
American corporations often transact their international business in USD because they believe it eliminates FX risk. Unfortunately, this is a false sentiment.
When it comes to international business, American companies have a global advantage. The U.S. dollar (USD) serves as the world’s reserve currency. This has created a global demand for dollars and led to certain industries (e.g., energy) being globally priced in USD. Because of the USD’s global status, many American companies transact all their international business in USD—but this may not always be the best move.
American corporations—particularly smaller and middle market companies—often elect to transact their international business in USD because they believe it eliminates foreign exchange (FX) risk. Unfortunately, this is a false sentiment.
Pricing transactions in USD does not eliminate FX risk. Instead, it merely transfers it to the trade partner, because the trade partner most likely operates under a different functional currency.
When to Price in USD
When deciding whether to transact in USD, a company needs to examine its business operating environment. There are instances when pricing international business in USD is a valid strategy for a U.S. company.
Two examples of this are:
Industry standard: certain industries have long-established USD-functional supply chains. Some examples of these industries include aspects of energy, agriculture and aerospace.
First-time global traders: new entrants to global trade have other risks to prioritize over currency risk (such as counterparty risk, quality of goods, shipping, payment, and more).
Why Do US Businesses Price in USD?
Even though a vast majority of industries are not globally USD-functional, many American companies still transact their international business in USD.
The most common reasons cited for this include:
Perceived FX risk avoidance
Ease with current process
Internal system incompatibility
This set of circumstances falls under managerial influence. A company that continues to transact global business in USD under these reasons has made a business decision that the ease of transacting in USD outweighs the potential benefits of transacting in local currency.
However, what these companies need to understand is that transacting their global business in USD can also come with hidden costs or risks.
The Cost of Pricing in USD
American companies transacting globally in USD may be exposing their business to potentially higher costs or reduced sales and margins.
Why?
Because their trading partner is most likely not USD functional, making the USD payable or receivable a foreign currency to that company. The foreign company will need to be compensated for absorbing the FX risk; to do so, they will likely “pad” prices to U.S. importers or demand price discounts from U.S. exporters.
Industry studies estimate the cost to U.S. businesses can range from 2%-10%. Importers face inflated pricing and payment delay risk. Exporters face uncompetitive pricing, reduced margins, possible payment delays or, worse, potential lost sales.
Management Taking Control
In a globally competitive marketplace, it is prudent for a company to question why it transacts its global business in USD. Is it industry standard? Or a lack of internal knowledge and inadequate systems?
As companies strive to grow revenues and reduce costs, it is possible that transacting business in USD is having a negative effect. Is the purchasing group overpaying for goods? Has the export sales team experience lost sales to competitors pricing in local currency?
At Xe, we work every day with companies doing international business. We understand the challenges companies face when transitioning to pricing their international business in foreign currency. Wherever your business is on this transition journey, the Xe Corporate Team can be your partner and help your company manage the FX risk component of international business. Visit our Business page for more information about our products and services.
To learn more about the costs to American companies for transacting in USD, understand how this impacts importers and exporters, and see some solutions other companies have tried, stay tuned for the Part 2 in this series.
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About XE.com
XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.
Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.
Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.
Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.
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Meet our Experts – Arnaud Béasse
28-07-2020 | Arnaud Béasse | treasuryXL
Welcome to the 10th and last (for now) interview of the ‘Meet the Expert’ series. This time we interviewed our brand new Expert Arnaud Béasse. Arnaud is founder of the advisory firm Arts+Brands and an expert in Debt Management. He started his career as Regional Financial Controller, cumulating the responsibility for IT.
Arnaud has more than 17 years experience in Banks focusing successively on Structured Asset Finance, Corporate Banking, DCM and in Multinational Corporates for their Energy and Metals trading and Project Finance. He created Arts+Brands to expand his entrepreneurial spirit by advising small ventures and start-ups (Fintech, Biotech, IT) for their Fund Raising and Finance strategy and also by getting involved in the daily operations.
Arnaud is fluent in English, German and French and is used to work in international, multi-cultural and virtual teams environments.
We asked him 11 questions, let’s go!
How did your treasury journey start?
During my first assignment as a regional financial controller, I have been immediately confronted to a complex consolidation of cash streams from different emerging countries with different currencies and regulations. Finding secure and systematic solutions has been challenging but also interesting and fun. This was the beginning of my treasury discovery, from which I moved then to asset finance, project finance, trade and export finance and later to the complete « corporates and markets » solutions offered by a large European bank.
What do you like about working in Treasury?
I find the central role played by treasury in supporting a business very motivating: it manages all financial resources a business needs to generate returns. Perfect understanding and anticipation of the needs (planning) and an accurate analysis of the resources available (controlling) are therefore essential. I also like the necessity of combining short term priorities like cash management and long term planning like investments.
What is your Treasury Expertise?
Capitalising on my long banking and large corporates experience, I have acquired a strong knowledge of all kind of debt solutions associated with credit, regulatory, compliance competencies. I have specialised in Debt Management, Fund Raising, Asset Finance, Leasing, Cash Flow Management, Trade and Export Finance and Project Finance. I am currently focusing on Sustainable Finance to support firms aligning their finance resources with their commitments towards the environment.
What’s the most important factor in debt management?
The starting point of debt management is a careful analysis and control of the cash flows. Borrowings need to align with the business cycle of the company and eventually its equity profile. Once the needs of each business line and the corresponding cash flow generation are consolidated, the adequate debt structure can be designed with a mix of junior to senior, short term to long term solutions and a calibrated interest rates structure.
What has been your best experience in your debt management career until today?
I remember a dramatic situation occurring during a local currency crisis in an emerging country, where we had arranged a large equipment finance. The debt repayment plan did not anymore match with the borrower’s cash flow generation and we were heading straight to a default situation. After long and numerous discussions, we managed to get transferred a large position on natural resources the company was owning but not operating and structured it in a way that the majority of risks were covered, the credit committees and respective boards were satisfied and ultimately the borrower managed to earn additional profit. I admit there is a part of luck in this experience but getting from this desperate situation to a point where all parties were so happy has been my most fulfilling experience so far!
What has been your biggest challenge in your career?
I consider the toughest challenges in a company are almost always linked to human resources management and termination of assignments. But if we remain within the treasury topic, my biggest challenge so far has been to accept a board decision not to conclude an M&A transaction, whereby all indicators (profit, risk, market position, further opportunities) were very favourable for the group and I had worked for more than one year on the case. Some months later, upon publication of the yearly results, it became clear why the project was rejected!
What is the most important lesson that you have learned as a treasurer?
Along the various experiences I had with treasury, the most important lesson might be to always seek the most simple and straight forward option. There are many ways of hedging a currency position, improving the average interest rate of a pool of debt facilities, leverage the value of an asset, optimise the return of positive cash position. But the risk and time associated to it can rapidly be disproportionate to the purpose and the size of the original transaction. Treasury shall normally create value, not necessarily profit!
How have you seen the role of Corporate Treasury evolve over the years?
Obviously, the role of Corporate Treasurer has become more and more complex. Treasury needs to deal with an increasing availability of alternative financial products, intensifying risk management requirements, regulatory and compliance constraints. But at the same time, the emergence of digital treasury platforms and integrated cash management systems are making the steering of treasury much easier and more accurate.
The coronavirus is undoubtedly an unprecedented crisis. In general, can you elaborate on the impact this virus has on treasury from your perspective?
Treasury is between a rock and a hard place: as a consequence of the crisis, sales are dropping and cash flows are missing but the financial obligations (debt, salaries, rents, supply, …) remain and the access (if not the availability) of financial resources become difficult. For treasurers who had a prudent cash flow management with enough resources to bridge the gap, it has been a confirmation for their risk management strategy. For others with more lean structure, it is, in the best case, a very stressing moment trying to find last minute and costly (not only in terms of interest rates) funding solutions. Some businesses, which have bet on a very tight business model, will probably be restructured. The crisis will certainly lead corporates to adopt more careful models with sufficient reserves and flexible organisations but also postponed or reduced investments.
What developments do you expect in corporate treasury in the near and further future?
The main trend is definitively the further digitisation of the treasury functions, offering more reliable, more secure and faster execution of the transactions: payments, cash management, trading, trade and export instruments, guarantees, etc. As the execution of transactions will be more and more automated and integrated in the supply chain systems, treasurers will shift their focus on analysing and planning for the financial resources in order to formulate strategies.
Another interesting trend for the treasurer is the further development of the non-banking debt market. This shall broaden the borrowers’ horizon, balancing again the bargaining power in favour of the corporates and generating even more tailor-made/OTC debt solutions.
What is your best advice for businesses without a Treasurer?
Running a business without a treasurer can only be considered for small businesses. For standard operations, managing the daily needs with modern digital tools will always become easier, even if substantial support shall be required during the implementation of a system. Once the system is running, the daily treasury tasks can be integrated in the accounting and finance agenda.
However, as soon as operations get more complex (investment, take-over, international development, restructuring…), the support of a specialist remains essential, be it for a limited period of time like part-time or ad interim…
Arnaud Béasse
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Planning a Large Purchase? Tips for Saving
23-07-2020 | treasuryXL | XE |
When there’s a lot you need to save, it can seem daunting, and you might not know where to start. We want to help you with your savings plan.
Most of our purchases are pretty mundane. Think about the purchases you’ve made this week. They were probably more along the lines of swiping your card at the gas pump and paying your bills online than the lines of booking an extravagant trip or buying a new vehicle, right? But every so often, we will make those larger purchases.
Whether it’s a solid investment for your family and lifestyle (like a home) or a well-deserved bit of fun (like a hot tub), these purchases won’t be as easy. You may have enough saved up to make this purchase right now, but it’s more likely that this purchase is going to require a bit of saving.
When there’s a lot you need to save, it can seem daunting, and you might not know where to start. We wanted to share some of our tips to simplify the saving process for your next exciting purchase.
1. Figure out your timeline and use it to create your savings plan
Depending on the type of purchase that you’re making, there may be a specific date by which you’ll need to make your purchase. Even if you aren’t working towards a set deadline, it’s a good idea to set one for yourself so you can determine how much you want to save each month.
If there’s no rush, you can base your savings plan on how much you can comfortably put away each month, without having to make any changes to your current spending habits. But if you have a target date for your purchase or you’d prefer to shorten the process, read on to see how you can save more each month.
2. Make a separate savings account for this purchase
You may already have a general savings account (and if you don’t, try to open one as soon as possible). But creating a new savings account just for this purchase has a few benefits:
You can visualize how much you’ve saved more quickly and easily;
You won’t be tempted to pull from your emergency savings or other important savings (and vice versa);
You can utilize accounts, tools, and services that you might not be using with your current savings account.
When you open this new savings account, take advantage of this opportunity to shop around your bank’s offerings or even other banks’ accounts. Some banks offer financial planning tools that can help you with your savings, or you could find a bank or account that will generate greater interest on what you’ve saved. Don’t just go with the first option available; take time to find the one that best suits your goals.
3. Reassess your budget
In general, you should revisit your budget on an annual basis, or any time you experience a change in your life or financial circumstances (such as starting or losing a job or combining finances with a spouse). Creating a savings plan is another time when you should take another look at your current spending. Determine how much you could comfortably put away each month, and how long it would take you to save at that rate. If you’re not happy with that timeline, try making a few changes to your budget to improve the efficacy of your savings.
There are some expenses that you can’t cut from your budget. Even when you’re saving up for a big purchase, you’ll still need to pay your bills, buy groceries, and put gas in your car in the meantime. But look at the subscriptions you pay for and the non-essentials that you buy and consider whether you need to budget for them
Even for the essential purchases, small changes like switching from name brands to generic, buying used, or comparison shopping online can add up to increased savings.
Need another currency for your purchase? Consider an Xe money transfer
You could be purchasing property in another country, or you could be making an investment. In these cases, your payment would. Sure, you couldjust make a card payment and let the exchange sort itself out in the payment process, or you could make a wire transfer. But when it comes to large purchases, there are a few unique advantages to using money transfer for your transaction.
When you’re exchanging a large amount of currency, the exchange rate can make a big difference in how much you need to provide. If you pay with your card or make a bank or wire transfer, your transfer will be made at their exchange rate. These exchange rates often come with hidden margins or are designed to favor the provider over you, meaning that you won’t get as much bang for your buck.
If you make your transaction through a money transfer provider, on the other hand, you can check the rates ahead of time and get a rate that you know you’ll be happy with. If you transfer money with Xe, you can guarantee that you’ll get a fair, honest exchange rate that comes from the live currency markets, with no hidden margins.
If you’re not on a time limit, there are a few tools you can take advantage of to ensure that you’ll get the best rate possible for your transfer. You can set a Rate Alert that will let you know as soon as your desired rate is live, or if you have the funds you can set a Market Order that will automatically purchase your currency when your ideal rate is live.
Or, if the rates are currently in your favor but you lack the funds or don’t want to make your purchase right away, a Forward Contract will allow you to lock in the current exchange rate and make your exchange or purchase at a future date.
Get in touch with XE.com
About XE.com
XE can help safeguard your profit margins and improve cashflow through quantifying the FX risk you face and implementing unique strategies to mitigate it. XE Business Solutions provides a comprehensive range of currency services and products to help businesses access competitive rates with greater control.
Deciding when to make an international payment and at what rate can be critical. XE Business Solutions work with businesses to protect bottom-line from exchange rate fluctuations, while the currency experts and risk management specialists act as eyes and ears in the market to protect your profits from the world’s volatile currency markets.
Your company money is safe with XE, their NASDAQ listed parent company, Euronet Worldwide Inc., has a multi billion-dollar market capitalization, and an investment grade credit rating. With offices in the UK, Canada, Europe, APAC and North America they have a truly global coverage.
Are you curious to know more about XE?
Maurits Houthoff, senior business development manager at XE.com, is always in for a cup of coffee, mail or call to provide you detailed information.
Visit XE.com
Visit XE partner page