Insight to All Things Currency and Treasury Management

This blog post is a very high-level recap of our latest whitepaper, Effective Currency Risk Management Requires Exposure Data You Can Trust Part 1: Setting the Stage – The Importance of Data Integrity in a Multicurrency Management Environment. Receive your complimentary copy of the full multicurrency accounting whitepaper (click here).

“FX risk management programs are only as effective as the numbers they use.”

Joseph Neu, Founder and CEO of The NeuGroup

In 2012, corporations lost $50.2 billion to currency volatility. In the first half of 2013, corporations lost $7.7 billion. Those losses represent an average impact to earnings per share (EPS) of $.03 – three times higher than the less than $.01 EPS deemed acceptable by FX managers and Treasurers.

These are impacts that fall squarely on the shoulders of the Treasurer. It is the Treasurer’s responsibility to manage currency risk within the bounds set by the organization and thereby avoid currency impact surprises.

For many Treasurers, that is not an easy job.

Why managing currency risk effectively is often very difficult

In reality, many Treasurers do not have an accurate, complete, and timely picture of their exposure. In that context, managing risk is incredibly hard to do well. It is the age-old garbage in = garbage out concept. If you cannot trust that you are getting a complete and accurate picture of your multicurrency account balances across the business, you cannot trust what that data tells you about your currency exposure, and you cannot trust your risk management program. Even if the data is accurate and complete, if it is 15 days too late, you cannot effectively manage risk.

Why is it hard for many Treasurers to get the right data at the right time? Barriers to getting exposure data that is Accurate, Complete, and Timely (ACT) include:

  • Inconsistencies across the enterprise on how multicurrency transactions are recorded and relieved
  • Inconsistent remeasurement rules across corporate entities
  • Ongoing operational noise that happens for any large multinational
  • Individual ERP systems pose their own difficulties

Furthermore, you do not know what you do not know. You are vulnerable to inaccuracies and incompleteness because neither manual reports nor treasury workstation exposure extracts apply the kind of scrutiny on account balance level data necessary to ensure that the data you are getting is indeed an accurate and complete reflection of your exposures.

The risks of garbage

Relying on inaccurate, incomplete, and/or untimely exposure data can lead to significant, and sometimes material, FX surprises. Furthermore, when you do not have ACT visibility into close to 100% of your exposures, you end up only managing some fraction of your true risk. That means whatever risk management program your organization uses will not be as effective as it could be. A lack of confidence in the integrity of the data also often means that you end up hedging your hedges – reducing the effectiveness of the program, increasing its cost, and potentially increasing risk as well.

Overcoming barriers to ACT

Yet managing currency risk is actually not hard – if your multicurrency accounting data is an accurate, complete, and timely reflection of the underlying exposures. To get ACT exposure data, organizations must leverage a best practices approach for defining currency exposures and ensure that those exposures flow through the accounting processes of balance sheet remeasurement and translation according to best practices. This process needs to be dynamic not static!

If your organization does have a problem with inconsistent and/or improper multicurrency accounting practices, the first step to resolving the issues is to collaborate cross-functionally. The second step is to institutionalize consistent processes and practices across entities – establishing centralized remeasurement processes, documented process controls, and consistent processes and practices.

The benefits of ACT

Multicurrency accounting data that is accurate, complete, and timely provides a global- and entity-level view of exposures, and what long and short positions are. It enables period-over-period analysis for better decision making. And it allows the drill-down into details coming out of accounting systems to look for organic exposure elimination opportunities. For the hundreds of companies we have worked with, getting to that point where they could trust their data yielded significant benefits, including:

  • Eliminate FX surprises and keep FX impact to less than $.01 EPS
  • Reduce the risk of compliance issues
  • Lower costs

In other words, when you have confidence in the integrity of your data – that it is accurate, complete, and timely – you are fully equipped to manage FX risk more effectively (i.e. better), and save money doing it.

Interested to learn more? Receive a complimentary copy of the full multicurrency accounting whitepaper (click here). And let us know if you would like to know when we release Part 2: Why Getting Data You Can Trust is Hard in a Multicurrency Accounting Environment – and What You Can Do about It.