Can You Accurately Set A Budget Rate?
As we head into 2019 the usual strategies and budgets that need to be delivered on become locked in place. However, within the foreign exchange (FX) markets the only thing that you can accurately predict over the next 12 months is market volatility.
Companies are beginning to embrace the uncertainties of trading overseas and in different currencies. Shrewd decision makers are protecting their profits with agile strategies that embrace the volatility of the markets and help secure a competitive advantage by setting budget rates where possible.
Read more on the foreign exchange markets here.
Budget Rate Trends and Changes
When buying or selling currency, the timing and method of execution can have a considerable impact on profit margins, costed levels, future cash flows and external pricing. Even ‘small’ variations can have a massive impact on your bottom line. As more and more businesses seize opportunities across boundaries and in new markets, they need to plan effectively against currency risk.
Businesses with offices or transactions overseas need to set budget rates for calculations between their functional currency and each of the currencies they work with. There is no common standard or easy method for accurately setting a budget rate and businesses deploy a variety of methods to try and combat adverse currency swings. Ignoring the risks and failing to protect your foreign exchange leaves your business exposed and poses a headache for financial decision makers.
An important step in managing currency risk is setting budget rates for your foreign exchange.
Rather than attempting to predict the foreign exchange markets, businesses are sourcing a more agile, dynamic approach that protects internal rates, cash flows and gross margins. This allows for confidence over the coming months and protects company profits.
A Dynamic Approach to Budget Rates
Three examples of the agile approach financial decision makers are taking include:
Using the current spot rate
The current spot rate could be used as a strategy however this is effectively betting the rate will go up from current levels over the next 12-month period. Probably the most frequent used by businesses is an arbitrary number based on a combination of the current spot rate and some or all the below factors to give the business a buffer against rate movements.
Average exchange rate from some previous times
Basing the rate on historical rates is also a potentially flawed approach. What has occurred in the markets historically bears no resemblance to what may happen in the future, as an example if one were to take 2016 around the time of the referendum where the markets saw a 20% drop in the value of GBP against the world’s currencies. If businesses were to apply a similar % difference in 2017 they would probably remain unprofitable.
Using the forward rate is probably the most accurate approach and used by most corporate treasurers as it is the rate that you could theoretically lock in the businesses forecast transactions over the next 12 months. In reality businesses do not hedge a full year of forecast transactions out this far. Further using this rate does not take in to account the margin FX brokers will take.
Protect Your Business
Currency risk is nothing new, but rather than enduring the uncertainties, decision makers are deploying agile, flexible strategies. Such strategies can be set for a week or 12 months, or in some cases longer – affording greater control. Setting a budget for your foreign exchange protects profits and allows for more accurate financial planning and security.
Central FX are here to help you do just that. With an ever-changing financial landscape, your dedicated FX specialist will work with you to understand your business, develop your risk mitigation strategy, implement any necessary changes and protect your profits.
By combining a personal service with the latest in international payment technology, we work hard to develop a strategy that meets the needs and goals of your business.
Choosing a knowledgeable partner who has your best interests at the forefront of your risk mitigation strategy will produce clarity and comfort for 2019.
Get in touch with one of our dedicated FX specialists to find out how we can protect your bottom line.