FX - it’s not just a Treasury issue

11 November 2016

View David Stebbings’s profile on LinkedIn 

With the increasing globalisation of trade the effect of currency risk on company performance has been steadily growing over recent years. Volatility in the currency markets has really brought this out into the open for many, particularly in the UK. This is reinforcing the importance of a robust end to end currency management process for all businesses, big and small.

Our recent Treasury Talk briefing highlighted four key tips for better management of your currency risk. This blog will briefly explore the first – “it’s not just a treasury issue”.

Click here to watch the Treasury Talk video.

Four tips for better management of your currency risk

FX Blog

 1. it’s not just a Treasury issue

Many people think of currency management as the bit that is undertaken by the Treasurer, particularly the entering into complex derivatives and structures with banks. In my view, however, that is only the last 5% of a strong process and many of the challenges are further back in the organisation’s currency value chain outside of Treasury. Hence why close interaction with various teams in the organisation is key for the Treasurer to be successful.

Sales and Procurement teams

Firstly, these teams negotiate the currency terms of underlying contracts for which the default position might be the functional currency of the organisation, for a UK entity this would be GBP. However, increasingly we are seeing companies investigate the underlying revenues costs of their customers and suppliers, which invariably raises some challenges regarding the currency used. It may be more advantageous for a UK business to buy and sell in EUR if they can convert back to GBP at a better rate than their European suppliers or customers. It should be remembered that it does not matter whether sales are priced in the currency of the seller or purchaser, the exposure still exists for both either directly or indirectly.

Secondly, some companies can be flexible by adjusting sales prices and therefore any impact of currency movements could be reflected in the cost of goods/services sold. However, even when sales prices can be adjusted to counter volatility, the sales team might decide not to take action due to other competitive factors.

Thirdly, the Treasurer is reliant on the forecasts of sales and payments as sent to him/her from the Sales and Procurement teams. Without accurate forecasts of flows effective management is, in my view, quite difficult.

Finance team

In my experience much focus is given to the currency risk associated with forecasted purchases and sales. However, there are other important sources of currency risk that are more ‘accounting focussed’ and as such the Treasury team needs to work closely with their Finance colleagues to manage them. For example, intercompany loans around the Group will be denominated in a currency other than the functional currency of one of the entities. Therefore for that entity there will be currency gains and/or losses generated over time.

Furthermore, in a global business there will be entities with differing functional currencies and when these overseas entities result are translated back into the Group reporting currency, these will be impacted by movements in FX rates. Some companies choose to manage this risk whilst others choose not to, but it is definitely worth understanding the exposures.

Summary

The above is just a taster of the challenge. Each business is different – the relative importance of these and other issues will vary, but it is key for the Treasurer to keep a strong dialogue with colleagues outside of Treasury to enable them to be managed effectively.

Please feel free to share your thoughts in the comment section below. In our next blog we will explore the “need to consider all exposures”.

View David Stebbings’s profile on LinkedIn 

Comments

Excellent post! ..thx for sharing ..;-)

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