Insight to All Things Currency and Treasury Management

According to FiREapps most recent Currency Impact Report, as of Q4 2016, North American and European corporates reported currency impacts of $10.47 billion. These losses are smaller than those reported in 2015, suggesting corporate treasury executives seeking effective FX risk management must become “currency aware.”

Regular readers of this blog know that FiREapps never tires of preaching the gospel of currency awareness. It’s our belief that effectively managing foreign exchange risk or fully understanding currency data begins with currency awareness.

In today’s environment, companies continue to expand internationally in search of increased market share/revenue and reduction of operating costs – financial results that can lead to increased cash flow and market capitalization. Expansion into these new markets requires the company to sell or buy in the local currency.

This expansion comes with risk and shareholders do not like surprises. As a result, boards, C-level executives and treasury and risk management professionals all need to be currency aware, so that they can serve as the hub of information for stakeholders who make question how risk is being managed.

Being currency aware means knowing the foreign currencies that are resident in the assets and liabilities of the Balance Sheet (as well as the foreign currencies the firm is planning to do business in, in the future).

Armed with this data, the CFO can proactively assess the foreign exchange risk that might follow any currency movement – and how those movements could impair the firm’s net assets. (Also, the CFO can determine how the P&L and future net assets could be impacted as future transactions occur and make their journey through the Balance Sheet to an impact on cash.)

The Importance of Accessing Data and Analytics in FX

What does a CFO (among others) need to become currency aware? Access to enterprise data and robust analytics to transform the raw data into information and intelligence that can be used for reporting and communication.

There is a long list of corporate treasury data that might play a role in the analysis. This data can include:

  • Asset and liability data at points in time
  • Revenue and expense data in an accounting period
  • Inventory purchase data associated with product manufacturing
  • Anticipated sale and purchase data
  • Rate data
  • Trade data associated with risk management programs

It is important that the data sources be identified, inventoried and validated to ensure the data is complete and accurate as it will be feeding the analytic views to tell the story.

But data is only part of a successful FX management recipe. The next key steps include:

  • Receiving and storing data with disparate data structures
  • Normalizing the data so it can be efficiently and effectively processed
  • Processing the data with currency domain-driven calculations to produce enriched data
  • Presenting the newly enriched data in a variety of forms (tables, charts, pivots, reports)
  • Storing enriched data so it can be processed to create additional views

Those organizations that are truly currency aware organizations are now using these steps to conduct:

  • Balance sheet exposure analysis
  • Future sale and purchase analysis
  • Budget/plan to actual analysis
  • FX gain/loss analysis
  • Constant currency analysis
  • Exposure management program performance analysis

Each of these helps drive a deeper understanding of the role currencies play in the financial results. Performing such analysis may seem resource intensive and time consuming, but we remind readers that – in some cases – failure to do so can result in surprises blamed on C-level executives.

What are you and your FX management team doing to become more currency aware?