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Can you neatly separate liquidity management and cash flow forecasting from foreign exchange risk management. No, you cannot! Welcome to CurrencyCast. My name is Agustin Mackinlay, I’m the Senior Financial Writer at Kantox and your host. In this episode, we take a look at the results of the latest survey from the European Association of Corporate Treasurers. We dissect this extremely informative survey and we show how currency risk management, when performed with automated solutions, actually helps treasurers in their most pressing tasks, liquidity management and cash flow forecasting.
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The EACT Treasury survey consists of a series of questions to about 250 group treasurers from multinational companies in Europe, regarding their priorities over the next 12 to 24 months. Unsurprisingly, cash flow forecasting is seen by 43.8% of respondents as the number one priority. One major advantage of the EACT Treasury's survey is that it provides continuity year after year, which allows users to make comparisons over time.
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From that perspective, it's worthwhile noting that 2023 marks the fourth year in a row that cash flow forecasting is seen as Treasurer's number one priority.
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A quick look at the remaining result shows that risk management, where foreign exchange risk management is bundled together with interest rate risk management and commodity price risk management, is relegated to priority number five. Two positions below what it ranked in 2021. Now, does that mean that foreign exchange risk management is seen as a less urgent concern? Not necessarily.
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Consider the case of a company that uses automated FX solutions to protect its budget rate with the help of conditional orders, while monitoring markets 24/7. This is a setup that occurs on a daily basis in our interactions with our corporate customers and prospects. What unfolds with this type of foreign exchange hedging strategies is particularly illustrative as it impacts many areas of financial management. Cash flow forecasts,
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the Treasury team gains flexibility to constantly update cash flow forecasts. By leveraging the information that comes from all those firm sales and purchase orders that are automatically heads as they materialize. Collateral management, by delaying the execution of hedges with conditional orders more netting opportunities are created. And in the event of unfavourable forward points, savings are achieved in terms of the cost of carry, and less cash needs to be set aside for the purpose of collateral requirements.
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And finally, working capital management, these programs reduce FX risk with great precision and then allow managers to confidentially buy in the occurrences of their suppliers and sell in the currencies of their customers. By buying the currencies of their suppliers, they are in a position to obtain extended payment terms. And by selling in the currencies of their customers, they diminish the risk in the accounts receivable in the event of a sharp currency devaluation.
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So there you have it. From this tech-enabled perspective foreign exchange risk management, which is part of the EACT Treasury survey’s priority number five, is inextricably linked to priority number one cash flow forecasting and to priority number two, working capital management. What's more, the need for automation takes us straight to the EACT Treasury survey’s priority number three, Treasury technology infrastructure.
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The tech-savvy treasurer, in other words, does not act as if foreign exchange risk management was neatly separated from other top priorities.
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Let us briefly go back to the main concern expressed by European treasurers in the latest EACT Treasury survey cashflow forecasting. Recent developments show the extent to which technology is being harnessed as we speak to address these concerns. Developments in technology, in particular in Artificial Intelligence in the field of pricing, forecasting and simulation are making it possible for treasurers to assess a wider range of scenarios than ever before.
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The insistence on rolling budgets consultants are putting forward the convenience of rolling budgets, where the latest developments are constantly updated in order to improve cash flow forecasting accuracy. And finally, automated FX hedging programs. These programs are configured in a way that lessens the need for super-accurate cash flow forecasts. One thing is sure at this time of the year, in 2024, we will be awaiting the results of the extremely informative EACT Treasury survey.
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It is a fair bet that cash flow forecasting will remain a top priority and that foreign exchange risk management will be seen as inextricably linked to that major concern.
