Insight to All Things Currency and Treasury Management

Welcome to the first post in our new series, Garbage In = Garbage Out. In this and the posts that follow, I’ll be talking about the importance of data integrity in multicurrency accounting. That’s a mouthful, but the concept is actually quite simple: if the data you’re feeding into your currency risk management software is garbage, the strategy it spits out will be garbage too.

The ramifications of all that garbage are clear: for one, you’ll be spending money managing risk that may or may not be real. And, as a result, you won’t be able to control the impact of currency volatility on your corporate financial statement, and you will continue to suffer erosion of your earnings per share. (As did many multinationals in the first quarter of 2013, when the average currency impact to EPS was $.03 – far higher than the $.01 or less industry benchmark.)

In this first post, let’s get clear on some fundamental concepts. An optimized currency risk management program requires:

1. An accurate, complete, and timely view of your currency exposures. The first step in managing currency risk is to identify where you are exposed. Everywhere you have a balance sheet or income statement item in a currency other than your reporting currency, you are exposed to currency risk. The second step is to decide if that level of risk is acceptable, and if not, how you’re going to manage it.

But what if the exposures you’ve identified are not accurate or complete? Imagine, for example, your ERP system tells you that you have a 10 million euro account receivable, while in reality that receivable has already been cleared. You make a decision to buy a euro/dollar hedge. You’ve just spent money to manage a risk that doesn’t actually exist, and in the process you’ve actually created risk.

Or what if your exposure identification is not timely? For many companies, it takes weeks to wade through ERP data and identify exposures. Imagine that at the end of the period, you realize that during the period you recorded – and cleared – a10 million euro account receivable. Between recording the transaction and clearing it, the euro fell 5% relative to the dollar, which translates directly to a $500,000 FX loss. By the time you identified the exposure, it was too late to manage the risk.

If you don’t have an accurate, complete, and timely view of your exposure on all of the currency pairs you do business in, how can you have an effective currency risk management program? The answer is that you can’t.

2. Visibility into all of your currency exposures. In the past, a world in which a multinational’s top five currency exposures accounted for a majority of its currency risk, managing just those five currency pairs was sufficient. Today, corporates recognize that their top five exposures do not account for the majority of their risk, and that smaller exposures involving more volatile currency pairs can combine to create significant currency impacts. As the treasurer of a leading Internet service company explained, “A lot of large moves in very small currencies can hurt you as much as small moves in very large currencies.”

We’ve all been educated to think about our investments as a portfolio. When making wise investment decisions, we don’t think about just Google, for example, but about our entire portfolio of stocks. Corporate leaders need to think about currencies in the same way. Because companies are exposed on so many currency pairs, and volatility appears in every corner of the world, avoiding currency surprises requires proactive risk management across your entire portfolio of currencies – all of the currencies you do business in.

3. That you be currency agnostic. Some companies look at their currency exposures and hope that the exchange rate doesn’t go the wrong way. Of course, hope is no strategy. Currency agnostic companies, in contrast, manage currency risk such that the impact of fluctuations falls below 1 cent of EPS, no matter which ways the currencies move. These companies don’t care what happens to any given currency because they’ve managed the risk in both directions, across every exposure.

When you have an optimized currency risk management program that gives you an accurate, complete, real-time view of your exposure across all of your currency pairs, literally at the push of a button, you will be able to both reduce risk and reduce costs. You’ll be able to manage risk better – to greatly reduce or eliminate surprise currency impacts on your financial statement. You’ll also be able to reduce costs by executing risk management tactics more effectively.

To hear a real example of the benefits of an optimized currency risk management program join us in a live webinar, The Power of Knowing: How Cloud-Based Analytics Improve Financial Operational Excellence for FX, on Friday July 26 at 2pm EST. FiREapps will be presenting with executives from Cabot Corporation, who will show how multinational corporates are leveraging cloud-based technology to make FX surprises a thing of the past.

And stay tuned in coming weeks for our next Garbage In = Garbage Out post, where we’ll dive more deeply into what happens when you don’t have accurate, complete, and timely visibility into your exposure across all currency pairs.