Interconnected Markets and Cash Flow Hedging Agility
This article is written by GPS Capital Markets Each morning, as I walk through the GPS headquarters in Salt Lake City, breaking news plays on flat screens lining the area where account executives and other members of the GPS team work. Whether it’s a natural disaster, international conflict, or trade agreement, being in an FX company will make you believe that a butterfly flapping its wings in South America could really cause a storm in the northern hemisphere. Breaking news flashing across screens can start a domino effect, with account executives checking reports, looking up currency movements, or getting on the phone to talk to cash flow hedging and other clients who might be impacted by events. When I was a college and graduate student studying cultural anthropology, every spring I applied for grants that would help me do fieldwork abroad. With a longtime love of cross-cultural exchange and the growing possibilities of big data, I started focusing on what’s called Network and Complex Systems Theory, which uses mass data gathering and visualization techniques to study underlying patterns in different systems, which could be economic, as we’re focused on at GPS; ecological; social; and more. Besides studying interconnected data points, just traveling between my home in Utah and Europe provided me with a fascination for the way trends spread and impact events in (sometimes) predictable ways. Today, it’s exciting to work in a field where I see the contemporary world’s interconnected nature daily—like having a finger on the pulse of a complex network of investing and divesting, growth and absorption. Seeing the proactivity and how detail-oriented the multi-person teams supporting our clients are also inspires me. Especially during the past year, unforeseen conflicts and shifting trade agreements (see All Eyes on the Peso by Michael Buck) create ripples and test GPS’ ability to predict and respond on the dot when market disruptions occur. While nobody has a crystal ball, cash flow hedging can anticipate and obviate losses. Examples of how businesses increase agility with cash flow hedging For companies of any size, foreign exchange exposure can increase operating costs, cause cash flow and balance sheet discrepancies, or increase anxiety about the value of assets and liabilities. To better understand how GPS teams assess cash flow exposure and provide agile solutions as events occur, the following provides specific examples of scenarios that required quick pivots of cash flows due to war, subsidiary closure, and more. Many examples show how GPS clients utilize hedging advice when unforeseen events take place and can illustrate the benefits of person-to-person collaboration that takes place in cash flow hedging programs. How cash flow hedging works When companies set up cash flow hedging processes, forecasting cash flows starts 12 months in advance. This process allows business to lock in better rates, providing certainty about the actual cost of expenses and liabilities. When a business implements a cash flow hedge, the use of a hedging instrument (a derivative) locks in the amount of a future cash inflow or outflow before market volatility hits. Cash flow hedge accounting then connects the income statement of a hedging instrument and a hedged transaction, offsetting the predicted changes in cash flow. Matching cash flows to offset losses due to currency market volatility, the change in the value of the derivative designated as a cash flow hedge will be reported as a component of other comprehensive income (OCI) and then reclassified into earnings in the timeframe when a forecasted sale or debt happens. Different types of cash flow hedging strategies There are three main types of strategies to offset forecasted cash flow issues: static, rolling, and layered. Common cash flow hedging strategies: The benefits of dedicated customer service while hedging cash flows The above examples show that conducting international business comes with multiple opportunities and challenges that many treasury departments struggle to manage if they are relying on individual banks. Yes, GPS beats bank rates and saves clients millions, but more importantly, advisors provide 24/7 attention to each client, getting to know their business needs and anxieties inside-out. Working in tandem with real experts in the FX space, clients get to engage in granular business development conversations on an ad hoc basis. If you find out that a supplier or payee in a subsidiary goes out of business, GPS will be there to give recommendations for finding new contracts, shifting resources to other markets, or simply implementing different hedging strategies. If a war or international trade relationship shifts, GPS uses its large bank of data and its experts’ decades of experience to create plans to offset losses or win new contracts across unaffected markets. 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. 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FranklinBalancing Innovation with Fundamentals for Lasting Value
In the always-changing world of finance and treasury management, the landscape is constantly changing with new technologies and trends. As a treasurer, you’re inundated with terminology and buzzwords. Yet you may find yourself unsure of how to effectively leverage these tools to drive value for your organization. If you’ve ever felt this way, rest assured, you’re not alone. Are you an experienced treasurer or someone looking to enhance their knowledge of financial management? We extend a warm welcome to TreasuryMastermind.com. Join our vibrant community and become a valued member of a network that prioritizes collaboration, expertise, and the pursuit of excellence in corporate treasury. Let’s initiate discussions and together elevate the art and science of treasury management! “Building a solid foundation is key” It’s essential to acknowledge that building a solid foundation is key before diving headfirst into the latest innovations. AI, automation, and other advancements hold tremendous potential. But they are most effective when built upon a bedrock of fundamental principles. Far too often, treasurers become fixated on adopting the latest technologies without first understanding their business thoroughly. This includes careful documentation operations, identifying inefficiencies, and implementing strategies for improvement. Creative destruction, the process of eliminating outdated practices to make room for innovation, is a powerful tool in this regard. Consider the many reports that consume valuable time and resources without clear utility—a prime target for streamlining efforts. I will always remember a great (and rather simple) piece of advice from a former boss. To whom I asked whether this and this report were really needed. “Stop doing it and see what happens. If nobody comes at you, it means nobody cares.” I followed his advice, which saved me two days of work every week for my team. Of course, I wouldn’t apply it without thinking if I were you. Ask around you before stopping a reporting activity. “Without a solid framework in place, even the most advanced tools may yield limited results” Prioritizing initiatives such as business continuity planning (BCP), staff education and training, and making clear roles and responsibilities within the Treasury function are essential precursors to technological integration. Without a solid framework in place, even the most advanced tools may yield limited results. Once these basic elements are in place, treasurers can begin to optimize their existing processes using a combination of technology and strategic planning. Implementing workflow tools to manage end-user requests, developing key performance indicators (KPIs), and establishing your own BIC for better banking relationships are all steps in the right direction. “Treasurers can unlock significant efficiencies and cost savings” A treasury management system (TMS) serves as the linchpin for many of these optimization efforts, providing greater visibility into cash positions, improving payment management, and facilitating intercompany transactions. Also, by centralizing cash management and leveraging in-house banking capabilities, treasurers can unlock significant efficiencies and cost savings. In the realm of foreign exchange (FX) management, transitioning from direct bank trading to an FX platform offers enhanced pricing, transparency, and security. These platforms seamlessly integrate with TMS systems, further streamlining FX transactions through automation and advanced reporting capabilities. “Treasurers can unlock valuable insights” As treasurers continue to modernize their operations, artificial intelligence (AI) and application programming interfaces (APIs) emerge as powerful tools for enhancing cash forecasting and integration with internal systems. Leveraging machine learning algorithms, treasurers can unlock valuable insights into cash flow patterns and optimize liquidity management strategies. API integration extends the capabilities of TMS systems, enabling seamless communication with other critical systems such as data hubs and ERP platforms. By aligning treasury functions with broader data strategies and automating accounting entries, treasurers can drive operational efficiency and ensure compliance with financial reporting standards. In essence, the journey toward financial transformation requires a strategic approach that balances innovation with basic principles. By prioritizing operational excellence, leveraging technology strategically, and embracing continuous improvement, treasury professionals can navigate the evolving landscape with confidence and drive lasting value for their organizations. To conclude, walk before you can run! Also Read
Benjamin Defays