There's no doubt about it: 2016 has been a challenging year for UK businesses operating internationally. From Brexit to Trump, CFOs have had to continually battle with the consequences of unexpected events that sent shockwaves through the markets. With the full effects of these issuesset to be felt moving into 2017,businesses need to ensure they have strategies in place now so that they are not caught by unanticipated currency swings.
British retailer Sports Direct warned that its profits for the current financial year would be at least £15 million lower following a "belated attempt" to protect itself against the fall in the sterling. Mid-sized companies cannot afford to take such a financial hit through unnecessary unpreparedness.
Unsurprisingly, the UK's exit from the EU will be the biggest question mark facing European markets, whilst Trump's promised fiscal stimulus and infrastructure plan are expected to stimulate growth and accelerate inflation, which ultimately will add pressure on the Fed to hike rates.
With such uncertainties hanging over the heads of businesses, it's likely that currencies, both major and exotic, will, in turn, become volatile – some analysts have even proclaimed that EUR/USD parity could become a reality next year.
So how best can CFOs implement a solid FX strategy to ensure a prosperous 2017?
Lay the foundations
Before rolling out any foreign exchange strategy, CFOs must realise that a risk currency management plan must be compatible with the whole business. While the treasury department may have once been an unnoticed department that managed the corporate books, this is no longer the case – risk management is a priority for all divisions in the company.
FX strategies must consider the distinct currency needs of the business –defining an exchange rate and taking a guess at expected sales volumes won't cut it. Instead, the finance team needs to work with the wider business to set an FX policy based firmly on target exchange rates and risk tolerance levels – this then needs to be established through empirical reasoning and actual numbers, not invented ones!
The CFO’s list of responsibilities spans from managing payments, making strategic investments, protecting profits to mitigating risk, and most crucially - maintaining liquidity. To say they have their work cut out for them is an understatement, particularly given that these used to be manual processes.
Once setting the FX strategy is added to the mix, treasury managers must work to balance their traditional duties with the demands of being a strategist. Furthermore, as a company grows, so do work volumes, placing tremendous stress on employees and increasing the probability of costly manual errors in the process. Here, automation can play a key role.
Automated solutions must be a fundamental pillar of the FX strategy for next year. These tools standardise formats, aggregate bank account information, consolidate cash management, normalise accounting practices, centralise dealing and funding, and provide a risk overview while managingexposure.
Instead of spending hours each day reconciling positions and processing payments, software services push payments automatically, move funds into the right accounts at the right time and reduce errors in the process. Most importantly, hedging activities also benefit from automation tools; predefined parameters can be set, and businesses can buy or sell an investment position, hedge against market exposure, and search for funding opportunities at the lowest rates on the market.
Managing from the middle
For those businesses that deal with a high volume of payments, it would be out of the question to monitor each currency in a silo. Not only would it be time-consuming, but if the enterprise were to look at each currency separately rather that assessing the whole payment flow, payments to suppliers and sales in different currencies could be dramatically affected.
To avoid this issue, CFOs must create a central point whereby one entity manages all payments, with input from different team members. Not only will this enhance efficiency, but it will also minimise the risk of profits taking a hit as a result of poor exchange rate management. Other benefits include increased liquidity and cash flow.
By following these simple steps, businesses will head into 2017 with a robust and cohesive FX risk management strategy. Although some currencies have experienced a particularly tough time, all currencies are exposed to such volatility – after all, it's not ‘if' the next unexpected event occurs, but ‘when’.