Insight to All Things Currency and Treasury Management

This is the second post in our new series, Garbage In = Garbage Out. If you haven’t read the initial post, check it out here.

Today, I want to continue our discussion of the benefits of a modernized currency risk management program. This is the kind of program where you are rightly confident that you have accurate, complete, and timely visibility into your currency exposures – that your data isn’t garbage. Accurate, complete, and timely (ACT) data is the only kind of data that you can confidently make decisions on. Only with ACT data are organizations able to manage currency risk to the standard of less than $.01 EPS.

5 benefits of a modernized, ACT-based currency risk management program

1. Manage risk better – Organizations with modern currency risk management programs greatly reduce or eliminate surprise currency impacts on their financial statements. One multinational, for example, went from consistently seeing currency impacts as high as $.06 EPS to eliminating currency surprises and keeping impacts below $.01 EPS.

Another way that modern currency risk management programs reduce risk is in the area of regulation. With increasing scrutiny on derivative use from auditors and regulators, ensuring that the organization really does have an accurate, complete, and timely picture of its true exposures can mitigate the risk of inadvertently using derivatives in ways that are not within the bounds of regulations.

2. Reduce costs – Smart companies are reducing risk in a way that is extremely cost effective; so they not only maximize their ability to manage risk and eliminate volatility, but they save money doing it. These companies are using analytics to drive down the cost of managing currency risk. In part, they’re increasing operational efficiency. One high-tech multinational, for example, generated operational efficiencies by creating a centralized process hub around a central bank and aggregated all trades against that bank, saving $1.6 million in the first year.

Managing risk cost-effectively also involves reducing transaction costs. Smart companies do that by not mis-hedging and by eliminating unnecessary exposures, leveraging natural offsets and operational hedging opportunities including organic exposure elimination, intercompany settlements, and cash conversions. One multinational materials company, for example, eliminated 63% of its exposure internally, eliminating associated transaction costs and realizing over $1 million in annual savings.

3. Have more time to do analytics – By automating the process of ensuring data integrity, the treasury team is freed to do more analysis on exposures and more effectively manage risk. The Treasurer of a leading Internet service company explains, “With real-time exposure management, we’ve freed up a lot of time to actually analyze what we should do about our exposures. In the past, there was no time. Basically as soon as we got our exposure we had to do something about it. Now there’s more IQ that can go into it, there’s more analytics that can go into it.”

4. Forecast better – The CFO of a leading high-tech manufacturer, for example, found that once he had an accurate, complete, and timely view of his currency exposure he was able to spend more time figuring out how to better forecast cash flow, revenue, and expenses – and thus better execute transactions. The company was able to shift its efforts from 80 percent data aggregation and 20 percent decision making to 80 percent decision making and 20 percent data aggregation.

In addition, within a modern currency risk management program, Treasury is a value add for the business, for example joining contract negotiations because the Treasurer has visibility into how contract decisions will impact the company’s currency exposures.

5. Continuously improve – Modern currency risk management programs don’t ensure data integrity once and then never again; they’re constantly vigilant to ensure that they’re not feeding garbage into the risk management process. The Treasurer at a Fortune 500 electronics distributor explains, “An efficient data gathering process allows us more time to discuss the qualitative issues surrounding our data and allows us to maybe get more involved in the operational excellence aspect of improving the data that’s fed into the system.”

So a modern currency risk management program has benefits beyond just reducing risk, even beyond reducing costs. But managing risk well requires a single trusted truth for total exposures and institutionalized data integrity processes; in other words, it requires confidence that the exposure data you’re feeding into your currency risk management software isn’t garbage.

In the next post in this series, we’ll talk about the importance of accurate, timely, and complete visibility into your exposure across all currency pairs – ACT data – so stay tuned!