A currency strategy and ability to accurately forecast are critical for businesses looking to manage foreign exchange risks and minimise potential negative impact on its bottom line.
When looking to protect against currency fluctuations, forecasting exchange rates is never an exact science, especially in the light of ongoing Brexit talks, trade tensions and a global economic slowdown. However, in times of extreme uncertainty there are actions businesses can take to reduce these risks. Stephen Hubble, Chief Analyst at treasury management specialist Centtrip, outlines five of them:
Simplify your bank account structure: Adopt account structures that match your business flows and reduce the number of accounts you have where possible. Today’s technology like Centtrip’s allows you to simplify your bank account’s structures by holding one multi-currency account – with a bespoke “sub-account” hierarchy for centralised cash management – and provides you with tailored reporting options to view specific business activities and transactions in real time.
Free up your time and liquidity through automation: If you hold cash in different currency accounts, you may be exposing your business to increased risk of currency fluctuations.
Multi-currency accounts like Centtrip’s give you real-time visibility and control of your finances in one place. It also means your foreign exchange is no longer a separate task but is embedded into your end-to-end treasury management process and integrated within your bank account structure, helping you eliminate any idle currencies and reduce your aggregate exposure to fx volatility.
Another way automation can help is through direct integration of your accountancy software – Xero, Sage or QuickBooks – with banking or fintech platforms. This arrangement will help you better understand your treasury data and streamline your cash flows in different currencies.
Break down your treasury costs: Understand what fees you pay and when. Many businesses still use a traditional FX provider, not realising they charge “hidden” costs.
In the same way, it is worth reviewing your business travel expenditure, in particular credit card costs. Many of those will come with hefty FX charges and admin processing fees when using them abroad. Very often that amounts to an extra 3–5% of the transaction value.
It is worth looking into prepaid multi-currency cards. Highly secure and accepted pretty much anywhere in the world, they allow you to hold a number of currencies to suit your needs.
They also often come with an app, enabling you to track and reconcile your spending in real time.
Maximise your use of hedging tools: In addition to a multi-currency account, forward contracts are useful. They enable you to lock in an exchange rate in your preferred currency for up to two years, which can be used for future purchases. Typically, forward contracts require a securitisation deposit of 2–5%, which does not tie up your cash flow, yet gives you certainty in the medium to long term.
Set a realistic internal target currency rate when budgeting, analyse the current market conditions to gauge potential fluctuations and their impact on your profit margin; and remember, markets move down, as well as up. Give yourself flexibility by hedging a proportion – maybe 50% of what you may need. That way you could take advantage of the rates if they go up.
Have you tried FinTech? While it is so easy to default to established relationships, it is important to review them from time to time to make sure you use the most cost-effective and efficient options available.
Surprisingly, almost one-third of businesses still believe high-street banks offer a competitive exchange rate, while nearly a quarter do not consider a specialist fintech company as a cheaper alternative, missing out on significant savings and solving operation inefficiencies.
Technology can streamline and speed up your payments, and often for a fraction of cost you used to pay. For example, automated currency rate tracking helps you obtain real-time quotations, allowing you to respond to currency market moves instantaneously. And AI and machine learning in the forecasting process can play a part in mitigating FX risks by helping explore different scenarios and stress testing your exposure to currency volatility.