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….
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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.
Choosing the Right Financial Strategy: Intercompany Netting Vs. In-House Banking
This article is written by GPS Capital Markets If you seek to optimize your organization’s financial obligations across subsidiary entities, understanding the concept of intercompany netting is essential. This method involves offsetting mutual payables and receivables among different entities within the same group, aiming to minimize the actual funds transferred between parties. When you master the intricacies of intercompany netting, including its operational processes, advantages, and limitations compared to alternative solutions, you’ll be in a better position for long-term decision-making. By comparing intercompany netting with in-house bank solutions, you can assess which approach best aligns with their financial objectives and operational requirements. Our guidance aims to support organizations in evaluating the suitability of intercompany netting within their financial framework. By analyzing the benefits and considerations associated with this method, businesses can make informed decisions that optimize their financial management practices. Key Takeaways: Understanding the Concept of Intercompany Netting Understanding the concept of intercompany netting requires comprehending its fundamental principles. These principles involve offsetting and consolidating financial transactions among subsidiary entities. This intricate process entails reconciling balances, managing transactions, and effectively accounting for fluctuating FX rates. By maintaining precise transaction management, organizations can streamline their financial procedures and diminish the number of individual transactions, ultimately resulting in cost savings and operational efficiencies. Balance reconciliation is critical because it preserves transparency and accountability within the intercompany netting process, ensuring all parties involved maintain alignment on financial positions. The management of FX rate fluctuations necessitates continual monitoring and timely adjustments to mitigate currency risk exposure and ensure precise financial reporting. Proficiency in these principles is vital for optimizing intercompany netting practices and cultivating stronger financial relationships within a corporate group. How Intercompany Netting Works An understanding of Intercompany Netting involves a detailed examination of the intricate netting process facilitated by tools such as FXpert among subsidiaries. This process enhances visibility, streamlines reconciliation efforts, and ultimately optimizes cash flow management within the organization. Using tools like FXpert enables subsidiaries to offset payable and receivable amounts within the company effectively. This approach facilitates the consolidation of intercompany transactions, thereby reducing the volume of individual payments that must be processed. Through automation and standardized procedures, FXpert ensures precise matching of invoices and payments, resulting in fewer discrepancies and facilitating smoother financial operations. The integration of FXpert in intercompany netting not only simplifies the reconciliation process but also equips organizations to enhance their management of cash flows across various business units. Overview of the Netting Process The process of netting involves the utilization of specialized tools to consolidate financial obligations among subsidiaries efficiently. These tools are designed to centralize netting activities, produce netting statements, and facilitate coordination with both internal and external vendors to ensure smooth intercompany transactions. By implementing these tools, companies can streamline the reconciliation process, minimize delays in payments, and decrease operational costs associated with intercompany transactions. The centralization of netting activities provides a comprehensive overview of outstanding obligations across various business units, enabling well-considered choices. Enhanced collaboration with vendors is achieved through automated communication and data sharing within the netting system, which promotes transparency and accuracy in financial transactions. Adopting such tools optimizes the netting process, leading to increased efficiency and control in managing intercompany relationships. Comparison: Netting vs. Without a Solution A comparison between the utilization of Intercompany Netting and the absence of a structured solution underscores the challenges that organizations encounter when managing intercompany transactions efficiently. Integrating treasury management system vendors can significantly enhance operational efficiencies, optimize cash flow, and alleviate operational challenges associated with intercompany transactions. Intercompany Netting presents a streamlined method for offsetting intercompany payables and receivables within a corporate group, thereby reducing the number of actual payments and simplifying reconciliation processes. Conversely, without a structured solution, organizations often grapple with manual matching, time-intensive processes, and an elevated risk of errors. By automating the netting process through specialized Treasury management system vendors, firms can attain real-time visibility into their intercompany balances, resulting in enhanced forecasting accuracy and superior decision-making capabilities. Ultimately, the adoption of Intercompany Netting practices can transform cash management procedures and bolster overall financial well-being. Benefits and Drawbacks of Intercompany Netting Understanding the advantages and disadvantages of intercompany netting is essential for organizations seeking to enhance their financial operations. While this approach offers benefits such as improved efficiency, cash pooling, and decreased disputes, it is necessary to acknowledge the potential drawbacks, including increased administrative tasks and complexities in reconciliation. Efficiency stands out as a significant benefit of Intercompany Netting. It simplifies the settlement process for intercompany transactions and reduces the volume of individual payments needed, which can result in notable time and cost savings for companies. Furthermore, the consolidation of cash management through cash pooling allows organizations to optimize the utilization of liquidity. Conversely, implementing and maintaining the netting process requires a higher level of administrative work, encompassing activities like managing various counterparties and ensuring adherence to accounting standards. Additionally, reconciling multiple transactions across different entities can present challenges due to the intricacies involved, demanding meticulous attention to detail. Considering Intercompany Netting vs. In-House Bank Solutions When deciding between Intercompany Netting and in-house bank solutions, organizations should consider several factors, including the operational structure, the discipline in financial processes, and the centralization benefits a robust netting center provides. Intercompany Netting facilitates the settlement of obligations within a group of companies by offsetting payable and receivable positions. This process improves efficiency by reducing the volume of external transactions required, thereby lowering banking fees and transaction costs. Conversely, In-House Bank Solutions utilizes a centralized entity within the organization to oversee intercompany transactions effectively. This method enables tighter control over cash positions and enhances visibility into overall liquidity management. Both alternatives offer unique benefits that should be assessed based on the specific requirements and priorities of the organization. Is Intercompany Netting the Right Choice? The assessment of whether intercompany netting is a suitable option for an organization involves examining its efficiency, enhancements in visibility, and the level of transparency it provides in financial operations. Comparing the advantages with the potential disadvantages plays a crucial role in guiding the decision-making process related to the implementation of an…