Comparing CFO and Treasury Roles: Responsibilities, Pain Points, and FX Software Benefits
This article is written by GPS Capital Markets Finance professionals are integral to the success of every business, playing vital roles that ensure financial health and stability. At the helm is the Chief Financial Officer (CFO), responsible for overseeing the company’s overall financial strategy, while the treasury department manages more tactical aspects of financial operations. Together, these roles complement one another, each contributing to the organization’s financial goals. CFOs and treasury teams work alongside advisors and contractors to ensure consistent cash flow and strict adherence to regulatory requirements. As CFOs are increasingly called upon to transform finance operations, treasury stands as an ideal area to strengthen a company’s financial soundness. By leveraging advanced FX software and automation tools, treasury professionals are able to mitigate risks, improve working capital, and enhance automation processes, allowing organizations to thrive even in uncertain markets. Let’s delve into how these dynamics between CFOs and treasury professionals shape the financial landscape. The Value of Treasury to the Organization Treasury departments contribute significant value to an organization by managing the cash conversion cycle. This involves ensuring that the company maintains enough liquidity to meet its financial obligations while simultaneously maximizing the returns on any excess cash. Treasury’s responsibilities range from hedging against currency fluctuations to optimizing cash flow across global operations. They handle the tactical aspects of cash flow management, funding, and risk mitigation, ensuring that the organization remains financially stable in both the short and long term. On the other hand, the CFO focuses on broader financial strategy, with an emphasis on long-term goals, investor relations, and high-level financial planning. The CFO’s role requires consolidating data across various departments and markets, ensuring regulatory compliance, and delivering strategic insights to the board of directors. CFOs depend heavily on data from different parts of the business to devise strategies that align with the company’s objectives while managing risks, including those related to foreign exchange. Pain Points for CFOs and Treasury Professionals Both CFOs and treasury professionals face distinct challenges in their respective roles. Understanding these pain points is crucial for enhancing operational efficiency and ensuring financial stability. CFO Pain Points CFOs often struggle with the consolidation of data from multiple departments and external sources. This process can be time-consuming and prone to errors, making it difficult for CFOs to develop accurate and timely financial insights. Additionally, staying compliant with constantly evolving financial regulations and hedge accounting standards presents an ongoing challenge. For CFOs, real-time access to data is critical for making strategic decisions, but manual processes often hinder their ability to act swiftly on key insights. Treasury Pain Points Treasury professionals, meanwhile, frequently contend with the overwhelming volume of data related to currency exposure. Managing this data manually can make tasks such as netting and gaining visibility into the company’s financial position unnecessarily complex. Hedging strategies, which require precise data for accurate implementation, add another layer of complexity. Furthermore, treasury teams must react quickly to market volatility, a task that is challenging without the aid of automated tools that can keep pace with rapid changes in the financial landscape. FX Software as a Solution FX software has emerged as a critical tool for both CFOs and treasury professionals, offering tailored solutions to address their distinct needs and pain points. How CFOs Use FX Software CFOs utilize FX software to gain a comprehensive overview of their company’s FX exposure and hedging activities. The software automates the preparation of financial reports and strategic plans, reducing the need for time-intensive manual data consolidation. Through the use of automated dashboards and real-time reporting tools, CFOs are able to access the insights they need during board meetings and other critical discussions, allowing them to make well-informed, timely decisions. This technology enables CFOs to focus on long-term forecasting, scenario analysis, and ensuring that hedge accounting standards are consistently met through automated processes. How Treasury Professionals Use FX Software For treasury teams, FX software provides real-time monitoring of currency exposure and facilitates the execution of hedging strategies with precision. Automation significantly reduces the need for manual processes such as spreadsheet management and data gathering, allowing treasury professionals to focus on higher-value tasks. Additionally, these platforms optimize cash flow management and minimize risk by automating hedging and intercompany netting tools, empowering treasury teams to respond more effectively to market volatility. Comparing the Pain Points Addressed by FX Software FX software effectively addresses many of the challenges faced by both CFOs and treasury professionals. For CFOs, the software streamlines complex data consolidation processes, automates regulatory compliance, and facilitates faster decision-making through real-time data insights. Treasury teams, on the other hand, benefit from the automation of labor-intensive tasks like data collection and trade execution, which reduces the impact of market volatility and improves overall risk management. Climbing the Career Ladder from Treasury to the C-Suite Although the CFO’s role focuses on high-level strategy and treasury teams concentrate on operational efficiency, there is a clear career path for treasury professionals aiming to advance to the C-suite. To successfully transition into executive roles, treasury professionals must adopt several key strategies. Broaden Financial Knowledge Treasury professionals aspiring to become CFOs need to expand their expertise beyond liquidity and cash management. Developing a robust understanding of corporate finance, including budgeting, financial planning, and capital structure, is essential for building the skills required to step into a senior executive role. Master Technology and Data Analysis As technology and automation continue to transform the finance sector, the ability to effectively leverage FX software for both strategic insights and operational efficiency becomes increasingly important. Professionals who can analyze and act on financial data quickly will distinguish themselves and be better prepared for leadership positions. Develop Leadership Skills Treasury professionals seeking to move into the C-suite must also focus on developing strong leadership and communication abilities. This involves managing cross-functional teams, presenting complex financial data to senior management, and influencing high-level decision-making processes. Strategic Involvement Actively participating in strategic discussions, such as risk management and long-term financial planning, gives treasury professionals the exposure they need…
Franklin
FX Hedging for Beginners: Reduce Foreign Currency Risk
This article is a contribution from one of our content partners, Bound What is FX hedging? FX hedging is a currency risk management strategy businesses use to protect themselves against losses caused by fluctuations in foreign exchange rates. Essentially, this means a business purchases financial products to protect itself against unexpected movements in exchange rates. Why do businesses hedge FX? When a business hedges its FX exposure, it enters into a financial contract that can lock in an exchange rate for a future date or protect the business if exchange rates move in the wrong direction. This means the business knows exactly how much it will pay or receive in its home currency, or at least will know a worst-case scenario, regardless of how the exchange rate changes. By doing this, CFOs and treasurers are able to forecast their financial performance more accurately. Many businesses also consider hedging FX exposure to prevent their margins from being compressed. Depending on the business, FX exposure can have very noticeable effects on top-line and bottom-line financial performance. How does FX hedging work? When a business hedges its currency exposure, it enters into financial contracts that mitigate the potential of financial loss. The finer details on this depend on the type of currency hedging method (which we’ll go over below). Depending on the business use case, companies can select different methods to help protect against losses caused by fluctuations in exchange rates. What are the different types of currency hedging? Internal Hedging Methods External Hedging Methods Automating currency hedging Many treasurers are looking into ways they can automate manual tasks such as currency risk management. Companies like Bound have put in place products to make this possible, giving businesses a cockpit of tools to make this a smoother process and improve efficiency. How to choose the right hedging strategy Businesses have the choice of internal and external hedging methods; they first need to decide which makes more sense for their business. The best hedging strategy for a company will depend on its specific circumstances and the way foreign currencies move through their businesses. Where treasury teams are uncertain of which strategy suits their needs, they should consult a financial advisor to choose the right hedging strategy for their needs. Currency hedging use cases Conclusion FX hedging is a complex topic, but it can be important for businesses that operate in multiple currencies to manage risk. By hedging their currency exposure, businesses can protect themselves from losses caused by fluctuations in foreign exchange rates. 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.
The 6 hidden FX costs every fund manager should know about
This article is a contribution from our content partner, MillTechFX In our newest blog post, we are highlighting some of the costs associated with FX execution and hedging that fund managers should be aware of and rank them in order of transparency. FX Execution Costs Execution costs are often the first thing fund managers will reference when speaking about FX costs. Think of a bank as a currency wholesaler, who will then discount away from their wholesale rate to incorporate a profit margin or ‘spread’ when they quote their clients. The spread will be impacted by various factors including, but not limited to: In theory, this cost should be easier to monitor and manage than all the other costs in this list. However, in practice, and even to this day, many fund managers cannot say explicitly what they are being charged. One of the best ways for a fund manager to understand their current execution costs is by carrying out regular Transaction Cost Analysis (TCA) via an independent specialist. TCA is to FX execution what an audit is to annual accounts – third party analysis ensures that your FX counterparties are not ‘marking their own homework’. Forward points Forward points arise in certain FX risk management products such as forward contracts or FX swaps and are a universal market cost that is largely influenced by the interest rate differential between two currency jurisdictions. Forward points can be negative or positive, and may be to the hedgers’ favour or detriment, depending on which currencies are being bought or sold. Nothing can be done to avoid forward points, but fund managers should understand that the forward curve isn’t always linear. The tenor of a hedge can be altered to take advantage of a non-linear forward curve in certain circumstances such as when the trade expiry date doesn’t need to match a pre-defined exit date. Any spread that is incorporated into a forward rate, or the far-leg of a swap, can be monitored using TCA, in much the same way as other Over The Counter (OTC) FX products. The Cost of Cash Drag If you’re a fund manager who hedges FX risk using products such as swaps, forwards or non-deliverable forwards, then you may have experienced first-hand a hidden cost of hedging that isn’t often spoken about – the cash drag associated with placing margin. When placing a hedge, a bank may request cash collateral (initial margin) to be held as security until the hedge matures and is settled. Further, movements in the FX market may result in more collateral (variation margin) being requested, to cover the new mark-to-market of the hedge. If a funds’ investible capital is held back for initial margin, variation margin, or contingent liquidity to cover potential variation margin requests at short notice, then deployed capital must work even harder to hit the target internal rate of return (IRR). It’s almost impossible to know, with any degree of certainty, where FX markets will move and to forecast total margin requirements throughout the life of a hedge – this means, that on day 1, it’s impossible to forecast how placing margin will impact a funds’ investment returns. For this reason, fund managers tend to seek out uncollateralized hedging facilities with each of their FX counterparties with a view to freeing up investible capital. However, hedging on an uncollateralized basis might introduce additional costs that are built into the exchange rate in the form of a credit valuation adjustment (CVA). Credit Valuation Adjustment (CVA) If a fund manager successfully negotiates uncollateralised hedging facilities with their counterparty banks, they should be mindful of the potential for additional FX charges when hedging. Uncollateralised hedging means that the executing bank is taking additional risk on a client when they hedge. After all, that bank has no security against that hedge and in the event of a client default the bank could potentially face a mark-to-market (MTM) loss. CVA is an adjustment in the FX rate to account for the possibility of default. CVA is not zero when FX hedges are collateralized, but it is heavily negated when compared to uncollateralised hedging. CVA will vary from bank to bank, for different clients and might be influenced by prevailing market conditions. This means when a fund manager is executing a longer-dated trade that induces CVA, they can’t know exactly what their hedging costs will be in advance. Although, generally speaking, as the tenor of a hedge increases, so does the potential mark-to-market loss and, therefore, the CVA charge. In order to maintain FX transparency and cost control, fund managers could explore using shorter trade tenors (e.g. 6-months or less) that don’t incur CVA. Historic Rate Rollovers (HRR) HRRs have been around for a while but get a mixed reception from different global regulators and are not generally considered best practice. The appeal of HRRs for fund managers comes from the fact that in theory there will be no cash movements that might normally arise from rolling FX forwards. Standard practice is for any mark-to-market (MTM) gain or loss to be crystallised at each roll date and for the fund manager to receive or instruct a cashflow accordingly. Instead, with HRRs, the single FX counterparty that holds the current hedge incorporates any potential MTM loss into the new hedge rate and the hedge ‘roll’ is performed ‘off-market’. It’s the FX equivalent of kicking the can down the road. HRRs should be considered more of a lending product than an FX product, because any accrued MTM losses are subject to a lending rate being applied to them before the new, off-market hedge rate is decided. HRRs are not considered best practice for the following reasons:: Fund managers should pay particular attention to the discretionary nature of continued access to HRRs every time a hedge is rolled forward, because it relies entirely on the credit appetite of the FX counterparty. HRRs are at their most valuable to a fund manager when they carry a significant MTM loss in…
Discriminatory Pricing Practices in Corporate FX
This article is a contribution from our content partner, Just The following is a transcription of our CEO, Anders Bakke’s, recent webinar: How to protect your business from overpaying on FX transactions. My name is Anders Nicolai Bakke, I’m a serial entrepreneur who’s been in the capital market for a long time and is now proud to be the CEO of Just Technologies. My team and I founded Just Financial during the acquisition of our first capital technology platform back in 2017. We wanted to start another business to solve treasury related problems for companies dealing in the FX market. In this webinar, we’re going to be covering the following: I hope you enjoy it and hope to be able to answer some of your questions at the end. Understanding the FX market I want to first talk about how over-the-counter financial markets are opaque and often hard to manoeuvre for non-financial institutions, such as private companies. What we’ve found at Just is that, in any market where you don’t have access to high-quality data, you are at a considerable disadvantage compared to those who do. In the FX space, counterparties are the ones who have access to the true market rates and they have found ways to monetise that disparity. This is a systemic problem within the market: companies are losing value during FX trades and that value is instead flowing into the profit pools of the banks. So how did this systemic problem manifest? Well, let’s take a look at the FX market and its discriminatory pricing practices: The FX market is very efficient as long as you’re on ‘the inside.’ Whether you’re on the inside is determined by how sophisticated you are, how many counterparties and data sets you have access to, and the understanding you have of the FX space. If you do have access to the right data and counterparties, then you can do your own price discovery and see if you’re getting a fair deal on your FX trades. If you don’t have access to this information and your FX provider knows this, then you’re probably being taken advantage of. Businesses (especially those who aren’t directly related to FX) usually only have access to the prices they see from around one to three banks. This is an issue because the fewer counterparties and rates you see, the less you have to compare. It doesn’t help that the rate banks show you is not the real market rate — it’s a rate that’s marked up both from the SPOT component and credit component. Because FX contracts are entered bilaterally (either peer-to-peer or principal-to-principal), banks themselves admit that it is easy for them to make a profit. Suggested reading: To understand more about whether your business’s FX rates and margins are fair, take a look at our article. How margins are structured in the FX market Now that we understand the issue at hand, we can look at how margins are structured in the FX market. Let’s say a large European bank wants to acquire $1 million from the interbank market. They would go to another large European bank and conduct the same kind of currency trade that everyone would imagine. The typical fees they’d pay for this acquisition would be somewhere between $2-10 per million. That $10 per million includes: So the bank pays that $10, and then turns around to find that one of their largest clients (say in the top 1% of flow) also wants to buy $1 million. In this case, the bank knows that this powerful company has the ability to ask 10-15 banks for a quote as they’re probably on an auction platform, or they have a Bloomberg terminal. Given the potential competition, the bank knows that it’s in their best interest to win the deal as quickly as possible, so they mark up the trade to just $50 per million. If the client accepts that fee, then during that entire process the bank has made a decent profit: they themselves paid $10 to acquire the currency from one of the other banks, and then went on to sell that amount for $50, therefore giving them $40 to pocket. But what about the other 99% of their clients who aren’t as large or savvy in the FX market? What about the average importer and exporter? What about companies who just need to trade $1 million in a vanilla trading pair rather than hundreds of millions? Unfortunately, these large banks know that the average company does not have access to enough counterparties to properly take part in FX auctions. They can therefore charge these companies whatever margin they wish. After many years of analysis, Just has determined that the average margin that banks give to businesses is between $200 – $20,000 per million. Compared to the average $10 that banks charge between themselves, we find this to be pretty insane! There is so much value-leakage from the corporate space that goes straight to the banks and it is for this key reason that we decided to launch our business. Why FX knowledge is important We’ve been in the market for a while now and what we’ve seen across our 100+ clients is how easy it is to approach banks for a real conversation on margins — as long as those businesses are armed with data. Why is this information important to you as a corporate treasurer or CFO? The solution This is not a piece about selling a product — it’s about exploring a systemic problem within the market. And the solution to this problem is actually quite simple. In order to protect yourself from overpaying, you need market data. In most cases just having access to non-tradable rates from Google or Yahoo Finance is not good enough. You need a systemic approach that allows you to see your historical exposure, volume, and current hedges so that you can build a case from which you can sit down with your bank. For this purpose,…
FXBeacon: Giving Back
This article is written by GPS Capital Markets Years ago, I read the book Rich Dad Poor Dad by Robert Kiyosaki. In the book, Kiyosaki teaches the concept called the “Law of Reciprocity,” where you reap the rewards both tangible and intangible by helping others. This is a concept I firmly believe in and rely on to guide my life. The company I’ve worked at for 22 years and helped build, GPS Capital Markets gives each employee one day a year to give back to the communities where we live. Last week I took advantage of this to deliver almost 19,000 pounds of food to the Utah Food Bank. Over the years I have learned that for me, giving back to others pays much better than anything else I do. Although I love giving to charity, I also believe very highly in education and helping other people succeed in their careers. To this extent, I’d like to point out a few ways to give back that can be invaluable. Influencing beyond the screen Several times a year I guest lecture at the local universities. A few weeks ago, one of my connections on LinkedIn started a new job at PWC and I happened to like his post on LinkedIn. I got this unexpected response back from him, “Thanks, David! I shifted away from core audit to treasury and foreign exchange due in part to your presentation at BYU. Looking forward to the journey!” For me personally, it made my day to see I was influential in someone’s life, to the point that they modified their career trajectory. One of the most recognizable things I do is appear on TV shows like CNBC discussing the markets and what is going on globally. I think this is very uncomfortable, and stressful. But, having spent many years in the FX field, I feel like my knowledge can help others. I’m not so sure that I get much back from this, but I feel obligated to share what I know with others. Today, it’s easier than ever to connect, collaborate, and share parts of ourselves with others. Yet, the challenge lies in how we contribute authentically and meaningfully, especially when sharing our knowledge and resources. Whether we’re mentoring, teaching, or offering guidance, our actions often have a more profound impact than we realize. For example, one LinkedIn connection recently reached out to thank me for influencing his career shift from core audit to treasury and foreign exchange after attending one of my presentations at BYU. Moments like these are a reminder that what we do matters more than we think. However, stepping into the spotlight, such as appearing on shows like CNBC, brings its own set of challenges. Many may perceive this visibility as glamorous, but for me, it often feels stressful and uncomfortable. Despite the discomfort and stress, I continue to participate because I believe my years of experience in the FX field can genuinely help others. It’s not about what I get in return, but rather a sense of responsibility to share what I’ve learned, knowing that even in a public forum, my insights might make a difference. Giving at the heart of GPS When GPS Capital Markets was founded 22 years ago, the goal was to approach business differently. Our mission was to use our knowledge to help treasury clients improve—analyzing, predicting, and responding to markets with precision and agility. My primary focus was ensuring our team had the training needed to guide clients in making informed decisions about managing global exposures. Over time, this evolved into developing tools that provided clients with greater visibility and oversight of their exposures, enabling them to make strategic decisions. It’s remarkable that, even with all the technology available today, achieving this level of clarity remains a challenge. GPS Capital Markets has developed a full suite of International Treasury management tools. These tools help make very complex tasks easy. For instance, our intercompany netting tool allows clients to look at all of their global intercompany invoices, and rather than pay them one wire at a time, they can now send one transfer for their netted total and make book entries for the remainder. Our Balance Sheet hedging tool looks at global FX exposure, and again nets exposures at the parent company, while allowing hedging at the Subsidiary. We don’t charge for these tools; they are designed to make life better for our clients. Then once clients can identify accurately what their exposures are to put together a program to hedge those exposures that suit their specific company’s needs. With most companies, I spend a lot of time getting to know how their business works, and what type of concerns they have. All companies are not equal and can have varying needs depending on their industry and even competitors. From there, I usually put together 3-4 different ideas on ways to implement and manage their currency exposure. Going through these ideas in detail with the client allows them to see that there are many ways to manage exposure and choose the correct one for their situation. So, how does this education and training both internally and externally help me? My clients are loyal and tend to bring business to me even when they move companies. Additionally, if you look at GPS compared to other FX businesses you will see that our client turnover is significantly lower. If we help clients make good decisions, they will pay us back with their loyalty. Want to be more successful and happier in life? Look at what you can do for others first; the Law of Reciprocity will bring you much more reward than what you spent in giving back. 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 to get more information….
Charting new paths in FX risk management across Latin American markets
This article is written by EuroFinance Latin America’s economic environment, with its unique challenges and opportunities, demands a tailored approach to FX risk management. Companies like Roche Finanz AG and Holcim are not just adapting to these changes—they’re driving them. The strategies employed by treasurers today are more crucial than ever, requiring an acute awareness of both the global financial landscape and the intricacies of regional markets. Latin America’s economic environment, with its unique challenges and opportunities, demands a tailored approach to FX risk management. By leveraging strong banking relationships, staying adaptable to shifts in U.S. monetary policy, and exploring innovative financial instruments like cryptocurrency, companies can position themselves to navigate these complexities successfully. Companies like Roche Finanz AG and Holcim are not just adapting to these changes—they’re driving them. By centralising operations, establishing in-house banks, and enhancing cross-border connectivity, these organisations are setting new standards in treasury management. At the 2024 EuroFinance Global Treasury Americas Miami conference Jesus Portillo, Senior cash manager at Roche Finanz AG a biotechnology company, and Carmelo Mendoza, Regional treasury manager at Holcim a Swiss multinational company that manufactures building materials, shared insights into the strategic approaches their teams have implemented. From optimising liquidity management to navigating the intricacies of foreign exchange risk, they reveal how their forward-thinking strategies are enabling their organisations to stay ahead in a complex and volatile market. Centralisation and efficiency at Roche Finanz AG Roche Finanz AG has adopted a highly centralised approach to its treasury operations, a strategy that has proven effective across its global and regional operations. Portillo highlighted that the company’s treasury functions, including front office, back office, and cash management, are all managed centrally. This setup ensures that processes are streamlined, efficient, and transparent, with the entire operation managed through a single ERP system. “Everything is centralised,” Portillo emphasised, noting that the team, comprising over 25 members, oversees 450 affiliates worldwide, with a particular focus on Latin America where Roche works with two core banks. Despite the efficiency of this centralised model, Portillo acknowledged that the region is not without challenges, particularly in terms of connectivity and regulatory limitations. These challenges require constant engagement with banks to ensure that the solutions provided meet Roche’s stringent requirements for accuracy and efficiency. Portillo also discussed Roche’s strategy of disintermediating banks through its in-house banking structure. While the company leverages its internal capabilities, it still relies on core banks for certain functions, particularly in Latin America. He noted that the company stresses connectivity and efficiency in its dealings with these banks, pushing them to meet the demands of the region’s dynamic environment. Holcim’s approach to financial solutions and connectivity Holcim, on the other hand, faces different challenges due to its diverse operations across various segments, including retail, roofing, and construction products. Mendoza explained that Holcim has had to adapt its treasury operations to support its broader business goals, particularly in providing financing solutions to customers. “Our main role as a company is to generate progress for people and the planet,” Mendoza said, underscoring the company’s commitment to supporting customers through tailored financial solutions. Holcim’s approach requires close collaboration with banks to develop customised solutions that meet the needs of its diverse operations. However, Mendoza pointed out that working with banks in Latin America, especially in Central America, is not without its difficulties. The region’s banking systems are often complex and fragmented, making it challenging to establish the necessary connections for seamless financial operations. To overcome these challenges, Holcim has been moving towards identifying and partnering with core banks that can handle the majority of their treasury processes across the region. Managing regional specificities: Argentina as a case study Both Portillo and Mendoza touched on the complexities unique to certain countries in Latin America. Giving the example of Argentina, Mendoza pointed to the high levels of trapped cash and the restrictive regulatory environment. He noted that companies operating in Argentina need to be highly creative in managing their cash and navigating the regulatory landscape. Portillo echoed these sentiments, sharing how Roche has to come up with solutions, such as utilising real bonds, to free up funds. Collaboration and innovation: the path forward Despite the complexities, both treasury managers see significant opportunities in the region, particularly through collaboration with banks and leveraging technology. Portillo emphasised the importance of maintaining frequent, straightforward communication with banks to address limitations and explore new opportunities. He highlighted Roche’s ongoing efforts to standardise and automate processes across the region to improve efficiency and transparency. Mendoza, meanwhile, stressed the importance of building strong, flexible partnerships with banks. He shared an example of how Holcim collaborated with a bank in Mexico to develop a financing environment tailored to the needs of their franchise network. This collaborative approach allowed Holcim to offer its customers better financial solutions, ultimately benefiting both the company and its clients. Conclusion The insights from Portillo and Mendoza underscore the complexity and dynamism of managing treasury operations in Latin America. The resilience of the U.S. economy and the Federal Reserve’s ongoing policy decisions will undoubtedly continue to influence Latin American markets, making it imperative for companies to stay ahead of the curve. Through careful planning and strategic foresight, treasurers can mitigate risks and capitalise on opportunities, ensuring their organisations remain stable and poised for growth in an increasingly interconnected world. 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.
How SAAS companies get burned by exchange rates
This article is a contribution from one of our content partners, Bound We 💜 finance teams from tech companies We spend a lot of time here at Bound talking with finance teams from venture-backed tech companies. Like most of the work conversations you probably have, our conversations follow a general outline like this: “Hey, Where you calling in from in the world?” [insert your favourite location]. Oh cool, my cousin lived there for a few years. She always said nice things. …… Wait for it…… here comes the obligatory weather comment… “Well, you’ve got better weather than us right now. I’d switch [weather-related complaint] for your [generic weather compliment that is, at best, loosely accurate].” Then the conversation turns to foreign cash flows–which some people might find boring, but we get pretty excited about here at Bound. After all, this is what we do. Why these finance teams talk about Bound Finance teams at growth-stage tech companies use Bound’s app to take foreign cash flows that normally bounce around with exchange rates and make them more stable and predictable. Classic use-cases for using Bound: Companies with these use-cases, use Bound’s technology to make these foreign cash flow streams more stable and predictable almost overnight. How exchange rates can hurt SAAS companies 🔥 One situation that comes up a lot with SAAS companies is the headache of foreign revenue contracts. Here’s an example of how exchange rates can potentially burn saas companies with a lot of international customers. THE SETUP Let’s pretend we’re a UK-based SAAS company with European customers. We report our finances in GBP. This is a fictional example roughly based on 2022 and 2023, but also includes simulated exchange rates into the future. We invoice monthly in arrears and recognize revenue evenly over the contract. THE SALE We sign a new contract with a new customer. Yeah! European customers don’t like paying in GBP, so we price European customers in EUR. The new contract is worth EUR 25,000/month for 24 months–EUR 600,000 total. Let’s pretend we sign the contract in Jan of 2023. The GBP/EUR exchange rate is about 1.125 at the time of contract signing. That’s roughly where the rate was for the first half of 2023. We’ll expect GBP 22,223.80 per month in revenue. Based on that rate, the sales team just booked GBP 533,371.26 . Nice work team! THE FIRST INVOICE 30 days later, we invoice the customer EUR 25,000 and record our GBP 22,223.80 in revenue. Of course, over the course of the month the exchange rate didn’t stay perfectly stable. We’ll pretend the GBP/EUR rate moved a little. Let’s say it’s now 1.127. Not a big deal, GBP 22,178.85. Whatever. GBP 44.95 isn’t a big deal. I can just write down our revenue a little, take a small currency loss or maybe I’ll just shrug this off. THE PAINFUL GBP RALLY But now let’s run a GBP-strengthening scenario for the remaining 23-months. At the time of writing, in early December 2023, GBP/EUR is up to 1.17. (This is mostly the true story of GBP/EUR over 2023) I’ve also thrown historic GBP/EUR data into a statistical rate simulator and told it to run a realistic GBP-strengthening scenario. Let’s see how our company does here for the rest of the year. So, that GBP 44.95 problem in the first month, that we brushed past, ended up being a GBP 63,525.13 problem over the course of the contract. That figure is harder to ignore, especially when you figure we have 50 customers with similar contracts. If the same scenario with all 50 of our European customers, we’re looking at currency losses or revenue write downs in the ballpark of GBP 3,000,000. And remember, currency losses aren’t just paper losses. This has a real impact to our GBP cash flow. THE MESSY RENEWAL One last problem. The renewal. The rate at renewal time was all the way up to 1.19. The customer is happy and wants to renew at EUR 25,000/month for another 24 months. Seems great, but that’s only going to be GBP 504,201.68 at this new exchange rate. So, I need to fight for a 6% price increase just to stay steady with the figures from our last contract or I realize revenue contraction from a happy customer. ;( Again, multiply that by 50 European customers and I’ve got a material renewal problem to deal with. We love this sh*t, so you don’t have to 😉 These are the types of problems that Bound helps SAAS-companies deal with. Reach out to see if you can make your foreign cash flows more stable and predictable. 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.
Natural Hedging Vs. Financial Hedging: Navigating Currency Volatility
This article is written by GPS Capital Markets When we talk about managing currency risk, two approaches often come up: natural hedging and financial hedging. At their foundation, they are two different strategies for tackling the same problem: protecting your business from fluctuating exchange rates. Here we’ll break them down, using some real-world scenarios to help illustrate how companies deal with this challenge. Whether you’re running a multinational or a small business expanding overseas, understanding these tools is crucial to managing your bottom line. What is Natural Hedging? In simple terms, natural hedging is when businesses adjust their operations to minimize exposure to currency fluctuations naturally. In one example, a US-based company with substantial European sales might opt to open production facilities in Europe. By earning and spending in the same currency, the business reduces the impact of exchange rate volatility. In another example, a US clothing manufacturer sells heavily in the Eurozone. Instead of producing everything in the US and dealing with perpetual USD-to-EUR exchange risk, they open a factory in Germany. Now, they can pay their local employees and suppliers in euros while also receiving their sales in euros. This natural hedging strategy shields the company from exchange rate swings between the dollar and the euro, ensuring their costs and revenues are in the same currency. Interestingly, a recent poll we conducted showed that 23% of respondents rely on natural hedging to manage FX volatility. This approach is particularly appealing to companies expanding into new markets and needing to align revenues and expenses in the same currency. How Financial Hedging Works In contrast, financial hedging involves using financial instruments, like forward contracts or options, to lock in exchange rates for future transactions. While natural hedging adjusts business operations, financial hedging focuses on leveraging market tools to mitigate risk. Let’s say there’s a UK-based electronics company that imports components from Japan. They have a large payment of ¥50 million due in six months. Rather than risk potential yen appreciation against the pound (which would make the payment more expensive), the company uses a forward contract to lock in today’s exchange rate. With financial hedging, they secure a fixed exchange rate, ensuring their future payment won’t exceed their budget due to unfavorable currency movements. A recent poll revealed that 54% of companies actively use FX hedging programs, reflecting a clear preference for financial hedging when it comes to managing cash flow in uncertain times. These tools offer flexibility, especially in unpredictable markets. The Federal Reserve’s Role in Hedging Strategies Speaking of market unpredictability and their role in hedging strategies, it’s impossible to ignore the role of central bank policies. A recent poll asked, “How many base points do you think the FOMC will cut at the next meeting?” with 72% predicting a 25-bps cut. However, on September 18, the Federal Reserve surprised markets by cutting rates by 50 bps—something that was not predicted by our LinkedIn audience. This underscores the importance of having an expert with their finger on the pulse to make predictions and revise strategies at a moment’s notice. Using the advanced automated features of FXpert, businesses can also react faster than humans to market changes. FXpert’s ability to monitor markets and lock in trades across time zones far exceeds manual capabilities, providing businesses with an edge in managing currency exposure. The Dollar Index and Hedging Considerations Another factor businesses must consider is the performance of the U.S. dollar. With the Dollar Index trading near 2024 lows, companies relying on natural hedging or financial hedging need to keep a close eye on these trends. A recent poll indicated that 75% of participants expect the Dollar Index to close lower than it did in 2023. A weaker dollar can lead to higher costs for businesses that import goods, making financial hedging a key strategy to safeguard against such volatility. Choosing Between Natural Hedging and Financial Hedging Ultimately, choosing between natural hedging and financial hedging depends on your company’s operations, cash flow, and tolerance for risk. For businesses looking for a long-term operational solution, natural hedging offers a straightforward approach to reducing currency exposure. However, if market conditions or transactions are more fluid, financial hedging provides the flexibility needed to navigate short-term fluctuations effectively. Both strategies have their place, and successful companies often use a combination of natural hedging and financial hedging to optimize their exposure. Whether you’re expanding into a new market or trying to manage ongoing FX risk, understanding both approaches—and leveraging tools like FXpert—can help you make informed decisions and protect your business from unexpected currency swings. The Value of GPS Capital Markets’ Expertise in Financial Hedging When you decide to go the financial hedging route, GPS Capital Markets’ team of experts becomes an invaluable resource. Our experienced advisors not only help you craft a tailored hedging strategy that aligns with your business goals, but they also provide real-time insights into market movements. With access to advanced tools like FXpert, we can help you identify opportunities, lock in favorable rates, and manage trades seamlessly across global markets. Whether you need ongoing support or quick adjustments in volatile situations, GPS offers the expertise, technology, and service that ensure you’re always one step ahead in managing your financial risk. 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 to get more information. Notice: JavaScript is required for this content.
Currency Markets: Hedgers, Capital Markets and Investors
This article is a contribution from one of our content partners, Bound One of my first lessons in hedging When I first started working in fintech, over a decade ago, I saw these videos on CME. I think the page might have changed a little in the past 10 years, but I think the videos are the same. Haha. I didn’t really understand hedging at the time, but this was one of my first lessons on how trading and capital markets work. Role of Hedgers Role of Speculators How I think of the market structure Today, I generally think of the market in 3 big segments. 1. People who have risk, but don’t want it—hedgers 2.Capital market and financial market participants that make everything work These roles are varied and different, but as a group they play the broad role of helping buyers and sellers find each other at efficient prices. Some examples of these are: 3. People who don’t have exposure, but want it—investors/speculators What role do you want to play? Anytime you have future cash flows in foreign currencies without corresponding hedges, you’re exposed to exchange rate movements between now and the time of that future cash flow. By doing nothing with future foreign cash flows, you’re running currency exposure similar to a currency investor/speculator, albeit for a different reason. Are you purposefully trying to take EUR risk? 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. Recommended Reading Notice: JavaScript is required for this content.