S&P 100 companies generate approximately 60% of their earnings from outside of their base operating currency. But currency volatility creates an ever looming threat that can destroy value fast. One S&P 100 MNC lost 9 percent of full-year earnings per share in 2015. Another saw $17 billion in sales evaporate. If you don’t address currency risk as you expand into new growth markets, the problem will only intensify.
No matter how sophisticated you are, you might not see it coming. Out of 133 global corporations, 56% said that lack of visibility and reliability of FX forecasts is the biggest challenge in managing FX risk. Volatility impedes predictability.
CONSTANT CHANGE REQUIRES PERMANENT READINESS
Market conditions are always evolving. Corporate treasury must be ready to respond to risks that could destroy value and opportunities to enhance performance. How can you be flexible if your supporting banking structures are rigid? A lack of flexibility is often layered in:
Bank account structures that are often hardcoded. Many accounts around the world hold pockets of cash in non-functional currencies, spread across banks.
Liquidity management being less mobile as a result of account structure. Viewing and managing liquidity across jurisdictions to support payment flows is complex. Idle cash sits in non-functional currencies, or, if centralized, then there is a clunky, often manual process for moving liquidity at the right time to support payments and optimize cash.
Currency exposures that are challenging to cohesively view, aggregate and manage. Hedging is often a separate activity from the flow of business that created the exposures.
The resulting inflexibility exposes companies to risks while limiting the possible upside amid shifting market conditions and emerging opportunities.
ACHIEVING FLEXIBILITY IN THREE STEPS
The good news is that the avenue to FX flexibility is through the above same three layers. Whether your global presence includes manufacturing, sales and distribution, or a blend of both, you can identify a finite number of choices for achieving change by assessing your business activities and transaction flows.
Accomplishing this task requires the following series of steps: