Insight to All Things Currency and Treasury Management

A treasury management system (TMS) can deliver invaluable support in managing an organization’s liquidity, but if an organization is relying on a TMS to shield it from currency headwinds, it may be making a costly mistake.

As regular readers of this blog know, when it comes to managing currency risk, FiREapps has long preached the principle of “Garbage In; Garbage Out”. This applies to TMS as well.

The typical TMS was never intended to manage currency risk; rather, it was designed to manage the liquidity of cash movement in various currencies. In some cases, functionality was added to treasury management systems to help corporations support the effectiveness of their hedging.

Both functions are data-dependent. So, even if your TMS is managing liquidity as intended, the value it delivers is likely compromised because it is fueled by inaccurate or incomplete data.

How Data Enhances FX Risk Management

To better understand the importance of complete and timely data in currency risk management, consider the basic steps in the process.

The first step in managing organizational currency risk is to identify exposures. Each balance sheet or income statement item recorded in a currency other than a company’s reporting currency represents potential risk.

The next step requires the organization to identify its risk tolerance. Once an acceptable level of currency risk has been identified, all that is left for the treasury team to do is manage to that risk level.

This sounds easy enough unless the exposures identified in step one are not accurate, current or complete. Data integrity is foundational to effective foreign exchange (FX) risk program. If an organization lacks accurate, complete and timely exposure data, a true picture of risk cannot be identified – meaning it cannot be managed.

What Treasury Systems Do – and Don’t Do

Now consider the role of the treasury management system.

The TMS serves as catcher’s mitt, capturing data and tracking it to help manage liquidity. Most systems lack the ability to harvest or process data. No analysis is performed; no risk is identified. The value they offer is limited to the quality of data it processes.

If your organization lacks comprehensive exposure data, your TMS does as well. If the TMS captures incomplete or inaccurate data, the value it delivers in managing liquidity is greatly reduced. Conversely, if a TMS is fueled by high-quality data, the value of the system is enhanced. (This is an example of the converse data principle: “Gold in; gold out.”)

Better Data Means Better Decisions

Your organization has invested substantial resources in its TMS. You should be maximizing its value by ensuring it has access to accurate exposure data. Most treasury management systems cannot make raw data actionable, and actionable data is needed to ensure all downstream processes are optimal for the predefined outcomes.

This is where FiREapps comes in. Our motto “Better Data. Better Decisions” is more than a tagline. It defines the essence of leveraging accurate and complete data in a timely fashion. Companies around the world have benefited from the increased predictability of earnings per share (EPS) and earnings before interest, tax, depreciation and amortization (EBITDA) thanks in a large part because they leverage high-quality currency data.

When you have an optimized currency risk management program based on accurate, complete, real-time view of exposures across your currency pairs – literally at the push of a button – you can reduce risk and reduce costs. You can better manage risk and greatly reduce (or eliminate) unanticipated currency impacts on your financial statement. You will also reduce operational costs by executing risk management tactics more effectively.

Want to know more?

Automating your organization’s treasury program is one way to efficiently introducing accurate, complete and timely data into your TMS to enhance your EPS and EBITDA.

Find out why world-class companies optimize their FX programs with automation.

Be part of our upcoming webinar on automating your FX program.