Insight to All Things Currency and Treasury Management

At the end of Q3 2012 we announced the results of our research showing that analyst attention to currency impacts during corporate earnings calls increased dramatically in the second quarter, at the same time that the value of the dollar relative to the euro rose significantly. Our takeaway was this: analysts are paying closer attention to what companies are doing to manage currency risk, because they’re increasingly aware of the significant impacts that currency risk can have on a corporation.

A story last month in The Wall Street Journal shows that awareness of currency risk is increasing among small businesses, too. And that’s positive, because currency volatility affects every company that does business across borders. In the article, “Small Firms Embrace Hedging,” Nicole Hong profiled five small companies that are using hedging to manage currency risk.

One of the business people interviewed, Gary Wool, chief financial officer at 35-employee Preferred Plastics & Packaging Co., explained well the purpose of currency risk management – for any size of business: “I don’t try to make money on foreign exchange. I’m just trying to ensure we know what our costs are. We know when we quote a price to a customer that we’ve locked in our profit.”

That’s a great way to think about how currency fluctuations impact businesses. Basically, they can shrink or inflate a company’s revenue and expenses. It’s important to realize that currency exposure is not just an accounting issue; currency-related impacts on a company’s accounts receivable and accounts payable turn into cash.

When we announced earlier this month the results of our research showing that companies sustained, in aggregate, $22.7 billion in currency-related losses in the third quarter, it surprised some people. But the fact is that companies of all sizes – from the small ones profiled in this story to the biggest multinationals – can sustain significant losses if they’re not managing currency risk.

Some of the business owners profiled in The Wall Street Journal story said they avoid currency management because they don’t have the expertise or the time to do it right. But there are organizations with dedicated products and services to help small and mid-sized companies handle their currency management needs.

It’s great to see increasing awareness around this issue, because it’s a big one, and it’s growing. From the perfect storm in the euro zone to currency wars everywhere, currency volatility is only going to increase. And that will mean more, and bigger, impacts to the companies – of all sizes – that do business across borders.