FX Management and the Function of Treasury: Tear Down Those Silo Walls!
One striking result of the Kantox & TMI FX Survey is the fact that 80% of participants say FX management is defined by finance people within the firm — mostly the Treasurer and the CFO. This is both disappointing and encouraging. It is disappointing because it shows the extent to which FX management is seen as a secondary concern, unworthy of attention from top management.
Yet, the silver lining in that finding is clear: there is enormous room for improvement and value creation. Companies have the necessary tools at their disposal to reach the promised land of modern, software-based FX management aimed at fostering growth while keeping currency risk at bay.
But Treasurers must speak up and lead the charge.
The ‘silo’ approach: missed growth opportunities
One of Kantox’s mantras is that FX management is a key driver of a firm’s competitiveness. By pricing and selling in local currencies, commercial teams can improve customer experience, add promising new markets to their portfolios, and take control of their own competitiveness. But that’s not all. By capturing the mark-up that is usually applied by clients who receive quotes in foreign currencies, firms have at least the opportunity to make foreign sales more profitable.
But none of this cannot be done in a ‘silo’ (*). In order to price in local currencies and grow the top line while hedging currency risk, financial and commercial teams need to work in close collaboration. Purchasing managers, too, must be onboard when buying in local currencies. This process widens the range of inventory choices and avoids costly mark-ups charged by suppliers who seek to protect themselves from FX risk when forced to sell in a currency that is foreign to them.
The ‘silo’ approach: uncovering new risks
The ‘silo’ approach to FX management may also lead to unintended consequences in terms of other, neglected risks. One such risk relates to forecast accuracy. When treasurers struggle to get real-time data related to FX exposure, they base their hedging decisions on outdated or approximative data like forecasts. Better-quality data such as firm commitments —requiring input from sales and purchasing managers— can help treasurers refine their hedge ratios and avoid situations of overhedging.
This is not an academic discussion: the impact of the Covid-19 pandemic has trounced most business forecasts. The pandemic has also put the spotlight on another shortcoming of the ‘silo’ approach to risk management, namely the interplay between currency risk and credit risk. Take the case of a firm that insists on selling in EUR to its emerging markets clients. Whether one realises it or not, currency risk does not simply disappear — it is transferred onto the shoulders of the customer.
In the event of a sharp TRY devaluation, a Turkish client might consider extending paying terms, hoping for a better exchange rate to settle EUR-denominated bills — a highly speculative and risky behaviour. Yet, it is the unintended consequence of avoiding currencies. Hoping to avoid the underlying currency risk, a firm can inadvertently create more credit risk for itself.
Act as one and tear down silo walls!
The commercial team, the accounting team, the treasury team, the finance team—all must act as one in order to foster growth. Currency Management Automation allows firms to achieve that by putting in place the right hedging program, while avoiding a myriad of operational risks (see: “FX Risk Management: The Absurd Cost of Softwareless FX Management”).
But this begs the question: who will lead the charge?
At Kantox, we believe that Treasurers must carry the flag and educate top management about the strategic importance of FX management. As Antonio Rami, Kantox’s co-founder and Chief Growth Officer put it during a recent Kantox webinar: “FX management is not a treasury-only topic, not even a finance-only topic. It’s a transversal topic of strategic relevance”. Going forward, this will be a Key Performance Indicator at many firms.
Stay tuned for the next edition of our blog series based off of the 2020 Kantox & TMI FX Survey. It will tell us how well firms are tackling the strategically important issue of FX management.
(*) See Phillipe Gelis: “Managing the corporate FX workflow: from silos to end-to-end automation”, July 2020.