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Insight to All Things Currency and Treasury Management

Research shows that more and more corporates are understanding the value of becoming currency aware (you can check out the details in our recent Currency Report here). Naturally, this often translates to a heightened awareness of internal exposures and risks— FX factors that CFOs, Treasurers and Controllers alike know are incredibly important to a company’s overall success.

“In general, measuring and managing exchange rate risk exposure is important for reducing a firm’s vulnerability to major exchange rate movements,” said Kristina Narvaez, president of ERM Strategies, in a 2015 CFO.com article. She went on to explain that these rate movements “…could adversely affect profit margins and the value of the organization’s assets.”

The knowledge that corporates have a huge advantage when they understand their internal and external currency environment is nothing new. However, especially if a company is utilizing a very manual process, this can be more easily said than done. Even with the most comprehensive manual process, there can often be areas that are under-managed, forgotten or that are just plain difficult to track:

— Your Biggest Risk (Not Just Your Biggest Exposure)

While many companies choose to manage what they can see (their biggest exposures), they sometimes forget that their biggest risks should be high on the list as well. These can (and often are) one in the same. But many times, large exposures can make up the highest volume while one’s biggest risks can be a large number of smaller possible hits. Keep in mind, a number of small volume hits can add up to a substantial loss. It’s imperative that you be able to quickly and efficiently manage/access data for both.

—Exposures from New Acquisitions

When it comes to mergers and acquisitions, the company doing the buying purchases a company and, by default, the old company’s exposures become their exposures on day one. Although this may seem like a fairly straightforward concept, it’s not rare for newly acquired exposures to be a bit neglected in terms of tracking. After all, it’s often difficult to know exactly where to look to find them. By making it a point to clearly identify and manage these fresh exposures, you’ll have the ability to strategically mitigate any risk before surprise loss rears its ugly head.

— International Expenses

These are some of the most difficult types of currency transactions to track but, at the end of the day, can still affect achieving overall financial goals. While most corporates can tell you where their revenue is coming from, they often don’t dig deep into their expense structure. Take a manufacturing company, for example— they may have parts purchased from one country, those pieces assembled in another country, and a final product that’s sold in a completely different country. Because of this web of different exposures, transactions like these can be extremely easy to miss or incorrectly record.

— Age of Current Process

In their August 2015 “Treasury 4.0” position paper, KPMG makes a great point about the relevancy of dated corporate currency processes.

“When looking at global macroeconomic changes and their impact on financial risks as well as technological developments in the area of software, one inevitably comes to the conclusion that standards which are seven or 15 years old can no longer be appropriate,” KPMG states.

If you’re managing your corporate currency with a process that is 7 years old (or more), it’s time to take a deep dive into its current efficiency. The effectiveness of your processes as a whole will ultimately have a major affect on how quickly you can obtain data, how comprehensively you can view your risks, and how much human capital you’re spending to reach your goals.

By ensuring you’re paying attention to all facets of your corporate currency program, including sources and risks that may not currently be on your radar, you’ll have the ability to be a more strategic and aware organization— saving your company significant time and money.