Gut feelings vs. FX tech: does your hedging strategy need an upgrade?
This article is a contribution from one of our content partners, Bound Cognitive biases are sneaky. They mess with your decision-making – without you even realising it. Whether it’s deciding what to have for lunch or how best to manage your FX risk, your brain is constantly taking shortcuts, often based on past experiences. Yes, we all love the easy route now and again. But these mental detours can lead you down the wrong path, especially when you’re under pressure. Are you thinking straight? Luckily for you (and us), neuroscientist and firefighter, Dr Sabrina Cohen-Hatton, gave some hot tips on how to spot and manage cognitive bias at TreasurySpring’s recent Tea & Treasury event. Two traps she taught us to watch out for are: Confirmation bias: seeking what you want to believe You’ve probably heard of this one. It’s when you subconsciously look for information that confirms what you already think. Take a CEO who strongly believes that acquiring a particular company will lead to significant future growth for the business. As a result, they focus heavily on positive forecasts and optimistic valuation reports, while downplaying or ignoring risks, as well as warnings from analysts. This is confirmation bias in action. So, next time you choose which FX forecasters to believe (don’t even get us started on that!), maybe think about whether you’re picking them based on your own idea of where the market is heading rather than objective factors. The mere exposure effect: playing it safe (maybe too safe?) Ever been tempted to buy the same tech brand again and again, just because it’s what you always do? That’s the mere exposure effect – a tendency for people to develop a preference for things simply because they are familiar with them. What you already know feels safe. But in FX, using the same hedging strategy on autopilot, or always choosing to have no hedging strategy at all, could mean you’re missing opportunities to manage your risk smarter. Beating the bias Can you really outthink yourself to make better decisions, though? Short answer: yes, you totally can – well, most of the time! Once you’re aware of the biases at play, you can hack your brain’s shortcuts and stop letting them hijack your common sense. Dr Cohen-Hatton shared a super simple but powerful framework that firefighters use called ‘decision controls.’ It’s a mental checklist that helps avoid snap, emotional choices. (And it could be handy for reducing bias in your FX strategy too). Restoring logic through FX tech Let’s take this thinking a step further, though. Why not take bias out of the equation by handing over the heavy lifting to tech? Sounds scary, but it’s actually pretty simple. So, instead of second-guessing yourself, you automate the process (well, get tech to automate it for you!). Forward contracts, for instance, can easily be automated based on specific business needs or market triggers, meaning you consistently lock in rates without reacting emotionally to short-term market shifts. Automated strategies can also be set up to execute regular currency conversions at set intervals, spreading risk over time. This removes the temptation to time the market, which can lead to decisions clouded by fear or optimism. Been there, done that… Bottom line: automated FX hedging strategies can help treasurers and CFOs make more consistent and objective decisions by avoiding the emotional trap of reacting to market swings. That means sticking to your long-term FX goals and getting more predictable foreign cash flows, with a lot less hassle. It doesn’t mean losing control over your hedging decisions. It’s just about making sure your strategy is driven by consistency and logic – not bias. Recommended Reading Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below. Notice: JavaScript is required for this content.
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Counterparty Management: Automating Payments and Collections
This article is written by Embat Automating payments and collections has become an essential requirement for any company aiming to optimise its financial management. Regardless of the structure of the finance team or the industry sector, automating these processes helps reduce operational risks, accelerate liquidity availability, and free up resources that can be redirected to higher–value activities. Counterparty Management: Technology as the Driver of Financial Automation Counterparty management – the use of technology to simplify, accelerate, and control financial processes related to payments to suppliers and the receipt of customer income– relies on connecting accounting and enterprise management systems with electronic banking to enable automatic synchronisation of financial data, minimising manual intervention. This technological integration not only enhances operational efficiency and reduces error rates but also provides real–time visibility into cash positions. This optimises cash flow management and mitigates risks associated with payment delays or collection issues.This technological advancement is supported by various solutions that, when integrated, enable faster, more accurate, and more controlled operations. The primary objective is to connect accounting systems with electronic banking, facilitating automated and synchronised financial information management, particularly through open banking APIs. Key Benefits of Automating Payments and Collections Automation delivers multiple tangible benefits that positively impact business growth. First, it lowers operational costs by reducing manual involvement, thereby minimising errors and issues related to manual invoice and transfer processing. It also allows treasury teams to dedicate more time to tasks with higher strategic value. Another crucial benefit is improved liquidity: by accelerating collection cycles and ensuring timely payments, companies can better manage their treasury and avoid cash flow tensions. Timely payments not only optimise internal management but also strengthen supplier relationships and enhance corporate reputation. Additionally, automation simplifies bank reconciliations and monitoring of accounts receivable and payable by providing real–time information that facilitates decision–making. Finally, it supports business scalability and flexibility, enabling the handling of increasing transaction volumes without the proportional increase in resources and adapting easily to new requirements. Steps to Implement an Automated Financial Transaction Management System Implementing a payment and collection automation system demands careful and thorough planning. The first step involves a detailed analysis of current processes to identify critical points, frequent issues, and duplicated tasks, defining the project’s scope with precision. Secondly, it is essential to select the most suitable technological solutions considering the company’s size and needs, prioritising scalability, integration, and user–friendliness.The treasury and accounting sectors have notably evolved over recent years, with the emergence of digital and real–time solutions that integrate directly with enterprise management systems. The third, and most critical, step involves securing the treasury team’s commitment since automation represents a cultural shift that should not be underestimated. Resistance to change, particularly in family–run businesses or traditional sectors, remains one of the main obstacles to the successful deployment of these tools.Training, transparent communication, and active participation of the team in defining new processes are key elements to transform the finance team into a primary ally of change. It is vital to understand that automation is not a final destination but an ongoing journey. Cultivating a culture of continuous improvement, with regular reviews and openness to new functionalities, is the best guarantee of long–term success. In short, combining the right technology, adequate resources, and effective change management maximises the potential of automating payments and collections, optimising financial management and strengthening the treasury function in any company. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below. Notice: JavaScript is required for this content.