Fiat Currency Management Crypto Challenges
This article is written by Kyriba Finance leaders have reason to avoid the volatility of alt coins but their lack of visibility into currency exposure could be leaving them vulnerable to a similar risk with some fiat currencies. Bitcoin’s skyrocketing and subsequent free fall in value should be a wakeup call to CFOs, corporate risk managers and others focused on currency management. But not for the reason you think. Corporate CFOs are largely staying away from privately issued alt coins such as Bitcoin, Ethereum, Tether, and others because of their price volatility. While Fundera reports that over 2,000 businesses – including AT&T and WeWork – in the United States accept Bitcoin, none of these organizations are holding cryptocurrencies on their balance sheets. They are converting to fiat currencies daily (or intra-day in some cases) to avoid being caught holding a devalued digital currency. The remainder of organizations that wish to attract crypto-centric customers use intermediary fiat to crypto payments processors such as BitPay who will translate crypto-currency to fiat currencies or gift cards in real-time for shoppers to purchase goods and services. These businesses have similar interests: they are not in the business of digital currencies and don’t want to be risking their hard-earned revenue and cash flow to uncontrolled price movements in the currencies they transact in. This argument will sound very familiar to any CFO or Treasurer. Their mandate is to minimize the impact of financial risks so investors can be exposed to the business risk and not increases or decreases in earnings due to currencies (digital or otherwise). Digital currencies are hard to protect against because the derivatives market is not fully developed, the utility of cryptocurrencies is limited which reduces the opportunity to construct natural hedges, and the process of converting into fiat currencies is frictional lacking the automation or liquidity that treasury teams have come to expect for standard currencies. And yet, while all these liquidity and hedging levers exist for finance teams to protect their balance sheets from (fiat) currency volatility, most CFOs aren’t very good at that either. A quarterly study recently reported organizations lost over $9.5 Billion in earnings due to currency headwinds in Q1 of 2021. In the trailing six months, this totals over $16B in lost value. How is this possible? The problem is not the inability to protect cash flows and assets from price volatility. Unlike with digital currencies, those structures work well for fiat currencies. The issue is visibility. CFOs do not have sufficient transparency into their cash flows and balance sheets to be able to hedge effectively, whether constructing natural hedges and/or going to the derivatives markets. As a result, forecasted cash flows are left unprotected and balance sheet accounts, captured within the depths of their ERP software, are vulnerable to every currency movement. Fortunately, there are relatively easy solutions to perfect visibility so better data-driven risk management programs can be implemented: There is certainly similarity in the underlying reasons why the majority of CFOs do not want cryptocurrencies on their balance sheets: they want to be able to remove the uncertainty of price movements. It is ironic that the same CFOs have much work to do to protect the same balance sheets from fiat currencies as well Note: This blog first appeared in CFO Dive: https://www.cfodive.com/news/crypto-challenges-shine-light-on-cfos-fiat-currency-management/605177/. Also Read Join our Treasury Community Treasury Mastermind 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 to get more information. Notice: JavaScript is required for this content.
FranklinReviewing Best Practices for Treasury’s Cash Flow Forecasts
This article is written by TIS Why is Cash Forecasting so Important for Treasury? For as long as corporate Treasury has existed, cash and liquidity management have been two of the primary responsibilities entrusted to practitioners. Today, the cash management function often includes forecasting and working capital analysis tasks as well, and in recent years, the emphasis placed by organizations on improving these functions has skyrocketed in importance. Why is this? By accurately predicting their company’s future cash flows, Treasury departments can make informed decisions regarding investments, borrowing, and overall liquidity management. Today, cash forecasting allows businesses to assess their ability to meet financial obligations, optimize cash balances, and plan for future capital expenditures. It also provides visibility into short-term and long-term cash requirements, enabling proactive measures to be taken to avoid cash deficits or excessive cash holdings. Moreover, cash forecasting serves as a fundamental tool for risk management, allowing treasury professionals to identify potential liquidity gaps, currency exposures, and interest rate risks. With an accurate understanding of cash flow patterns, corporate treasurers can ensure that sufficient funds are available to support daily operations, manage working capital effectively, and seize growth opportunities. In 2023, industry data has clearly highlighted the extent to which cash forecasting is being prioritized by corporate practitioners. In fact, a recent panel survey of over 250 practitioners recently highlighted that cash forecasting remains a critical priority not only for treasury, but for the CFO as well. In addition, this survey evaluated the investment plans of treasury groups over the next year and found that cash forecasting technology is top of the agenda for new spend over other areas such as payments and security. While there are many reasons for this, a pronounced spike in volatility that has been impacting the corporate environment since 2019-20 is one major factor. – Cash Forecasting is Critical During Periods of Heightened Volatility Heading into 2019-2020, numerous corporate treasury studies from Strategic Treasurer and the Association for Financial Professionals (AFP) had already shown that the importance of cash forecasting was increasing in the minds of practitioners. Following the aftermath of the 2007-08 financial crises, many treasury teams had reprioritized the forecasting function as a means of better identifying liquidity risk and preparing for adverse events. However, the 2020 pandemic and the subsequent geopolitical and supply chain crises have clearly put these priorities into overdrive for many teams. As it stands today, a myriad of disruptions continue to exasperate the global economy and are amplifying the need for accurate and timely cash projections, as well as improved risk management and liquidity optimization. With revenue streams fluctuating, demand patterns shifting, and supply chains experiencing severe disruptions, businesses have little choice but to develop a comprehensive understanding of their cash positions to mitigate risks, ensure financial stability, and make strategic adjustments. Going by the data, 62% of enterprise-level treasury practitioners in 2019 indicated that cash forecasting was the function they spent most of their daily time on. This was higher than any other listed function including payments, security, and compliance management. These numbers increased even more during 2020, and in 2022, 61-68% of practitioners across small, mid-market, and enterprise companies indicated that developing skills for more effective cash forecasting were more important than any other skillset. In large part, this added emphasis on cash forecasting in recent years is due to the following reasons: 1. More Unpredictable Cash Flows: Economic volatility often leads to fluctuations in customer demand, supplier performance, and market conditions. As a result, cash inflows and outflows can become more unpredictable. Cash flow forecasting allows treasury to gain visibility into potential cash flow disruptions (i.e. late vendor payments, reduced sales revenue, etc.) and adapt their liquidity management strategies accordingly. 2. Greater Need for Risk Mitigation: Heightened volatility brings increased risk, including potential credit defaults, market volatility, and liquidity challenges. By accurately forecasting cash flows, treasury teams can better identify and mitigate risks associated with cash flow shortfalls. This includes proactively planning for contingencies, arranging alternative funding sources, or renegotiating supplier payment terms to ensure the organization’s ongoing financial stability. 3. Data Requirements for Decision Making: During periods of volatility, making well-informed financial decisions becomes even more critical. Cash flow forecasting provides treasury (and the CFO) with valuable insights and data regarding the organization’s liquidity position, which enables them to better evaluate investment opportunities, assess the feasibility of expansion plans, and make strategic decisions about financing. Accurate forecasts also help minimize the risks associated with capital allocation decisions. 4. Stakeholder Communication Requirements: Sudden, unexpected, or prolonged volatility often triggers increased scrutiny from stakeholders such as investors, lenders, and regulatory bodies. An accurate and timely forecast process can quickly provide up-to-date information for these stakeholders, demonstrating the organization’s ability to manage cash flows effectively even in uncertain market conditions. This ultimately enhances transparency and builds confidence among various stakeholders, partners, vendors, and customers. 5. Focus on Cash Preservation & Optimization: When cash flows are uncertain, preserving cash becomes crucial to ensure the organization’s survival and resilience. Cash flow forecasting helps treasury identify potential cash conservation measures such as cost optimization, inventory management, or negotiating favorable payment terms with suppliers. It also allows practitioners to take proactive steps to manage cash outflows and maintain an adequate cash cushion. Given the above factors, it’s easy to see why cash forecasting has become so important during the past few years. But as companies increasingly prioritize the cash forecasting function, there is less and less room for error – especially since numerous other stakeholders are relying on treasury for accurate data and information. For this reason, it is critical that practitioners adopt an automated, streamlined, and comprehensive forecasting workflow that addresses financial performance across the entire company. Let’s explore further. A Standardized 7-Step Approach to Cash Forecasting Having analyzed treasury’s cash forecasting functions across thousands of companies over the past few years, the below workflow represents seven of the most common (and important) steps that a cash forecast should consist of. In addition, the following infographic highlights key steps that TIS experts have identified as helping refine the forecast process even further…