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Managing Currency Risk – What the Global Pandemic has Taught us so far and What we can Learn from Elite Level Golf

For most CFOs, FDs and finance executives managing currency risk is difficult enough but when you throw in a global pandemic it becomes even more complex.

Forecasting & Cashflow Management – A Hard Job Made Harder

Under normal circumstances, forecasts involving foreign exchange are far from simple. Finance departments are required to closely monitor a whole number of different functions. They need to be aware of the impact that daily price fluctuations can have on internal costing levels and cashflow should margin calls need to be paid. Consideration has to be given to drawdowns and payments as contracts mature and suppliers need paying. Recently won business may require immediate hedging in the market and accordingly a deposit arises. All this whilst juggling ongoing sales forecasts that are liable to change suddenly.

That is when things were easy. Rewind to mid-March and the outbreak of COVID-19 across the world, that job became even harder.

The current levels of uncertainty only serve to magnify the complexities involved in the above job description. Currency rate movements are the bane of many finance professional’s lives at the best of times. In 2019 the pound enjoyed a volatile year and ranged approximately 12% in value against both the US dollar and euro. Over a period of less than a month between February and March the pound achieved the same feat and then some, losing 15 cents against both currencies only to then rapidly recover. Managing the impact of this against a backdrop or potential supply chain issues, a fall in orders and a government lockdown could be described as mission impossible.

Job Roles Have Changed – There’s no I in TEAM

The regrettable impact of COVID-19 has also meant that many employers have been forced to make staff either redundant or furloughed. Remaining employees not issued ‘key worker’ status are now operating from home. As a result finance teams have been required to adapt. Communication is one obvious area of change and despite the multiple options available, the inability to have an actual face to face meeting with one or multiple people at once has proved challenging. Following on from this, important and sometime split second decisions are still needing to be made but not necessarily by the same people or with the careful time consuming approach as before. Staff are now being asked to undertake tasks they are not familiar with as defined roles are replaced with more fluid overlapping ones.

However not all change is bad. Finance teams operating differently because of the pandemic may find the previous red tape involved in making decisions no longer exists. Less people need to be consulted resulting in quicker decisions which can be vitally important, especially in current market conditions. The task of first booking currency, setting up a payee and then transferring the funds can span over a number of different employees. With staff being forced to acquire new skills and expertise, in the future it could well be the case that that same task can now be the responsibility of just one person.

Fail to Prepare, Prepare to Fail

Many companies refuse to acknowledge or are simply unaware of the pitfalls that a lack of management of your currency requirements can have on their business. When that realisation does become apparent it is often too late. For example, according to the latest release from the Office of National Statistics, the average profit margin for a UK manufacturing company stood at 9.4% for Q4 2019. As mentioned earlier, between February and March of this year, the pound devalued over 12% against both the dollar and euro.

There is no doubt that even some of the most prepared companies will have been caught off guard by this event. However, they will have afforded themselves the flexibility to adapt whilst having the confidence of knowing what to do next. For companies unprepared, under resourced or just not paying attention this can result in a feeling of anxiety and loss of control. This is often when the biggest mistakes are likely to be made. High levels of uncertainty and volatility, coupled with a change in work procedure make for a perfect storm.

What is the Answer?

Foreign exchange in many cases is a necessary evil and if businesses could operate solely in one currency they would; despite the obvious repercussions for Central FX. However the reality of the situation is they cannot and therefore whatever the weather, should it be a global crisis such as we are experiencing now or a time of far greater certainty, currency management needs the attention it deserves.

We advocate that our clients manage their currency risk with a documented policy so that strategy is one less thing to worry about. There is not a one size fits all approach and therefore we also encourage our clients to manage their risk using the data that is unique and available to them and operate this centrally in one place.

Nobody can reliably predict with any degree of certainty how currency rates will perform. A good rate on a bad day is a bad rate on a good day. Having an agreed strategy at all levels of the business and executing using the most up to date data available to your company will always be the safest way to manage currency risk.

What has This got to do With Golf ??

The highest performing golfers in the world employ caddies who are not just there to clean clubs and carry bags. Caddies are also there help the golfer make those important decisions on what club to use and how best to approach the next hole. We see ourselves in a similar way with our clients. Whilst the club remains firmly in their hands, we are here to help with the course management, to ensure they function to the best of their ability, through the execution of their own currency risk policy.

To assist us we are helped by our bespoke software HedgeMaster, designed for companies with currency exposures of £2m or above. HedgeMaster accumulates data from on a number of areas of the business such as company forecasts, profit margins, payment terms and risk appetite. With the help of a dedicated risk manager, this data is then used to produce a policy unique to each client. The policy is continuously updated on a monthly basis with the ability to upload new forecasts each month. Currency trades recommended by the policy can be discussed at length with a risk manager to ensure clients feel completely in control irrespective of what exchange rates are doing.

A formalised and agreed currency risk policy allows clients to focus on the job at hand rather than having to worry about the many external distractions the foreign exchange markets can bring. Caddies cannot control the weather but they can give the golfer the best opportunity to do what they do best.

For a completely free currency risk assessment resulting in a bespoke currency risk policy for your company, please contact us and we will arrange a time to discuss with one of our currency risk experts.

Central FX is a leading foreign exchange service protecting corporate and private clients since 2008. The benefits of overseas trade can be huge. We help you to get it right the first time and every time.

Get in touch with one of our dedicated FX specialists to assess your currency risk and find out how we can protect your bottom line.