Cash & Liquidity ManagementFXFive reasons why FX integration with treasury operations is a must

Five reasons why FX integration with treasury operations is a must

Stephen Hubble, Chief Analyst at treasury management specialist Centtrip, outlines five reasons why FX should be integrated within treasury operations.

A currency strategy and ability to accurately forecast are critical for businesses looking to manage foreign exchange risks and minimise potential negative impact on their bottom line.

Forecasting exchange rates is never an exact science, especially in the light of ongoing Brexit talks, trade tensions and a global economic slowdown. However, in times of extreme uncertainty there are actions businesses can take to reduce these risks – and FX integration within treasury operations is a starting point. here are five reasons why:

1. Simplify your bank account structure

Adopt account structures that match your business flows and reduce the number of accounts, where possible. Keep open only the essential ones. If you are based in Asia and your functional currency is the US Dollar, using an Australian Dollar account is impractical as it is more cost effective to make payments out of the functional, US Dollar account.

Today’s technology allows you to simplify your bank accounts structures by holding one multi-currency account with a bespoke “sub-account” hierarchy for centralised cash management yet provides you with tailored reporting options to view specific business activities and transactions.

2. Free up your time and liquidity through automation

If you hold cash in different currency accounts, you may be missing out on optimising your liquidity and are potentially exposing your business to increased risk of currency fluctuations.

Check if the funds you initially set aside for local payments have not been used and are now idle. Multi-currency accounts give you real-time visibility and control of your finances in one place. It also means your foreign exchange is no longer a separate task but is embedded into your end-to-end treasury management process. It is integrated within your bank account structure, eliminating any idle currencies and reducing your aggregate exposure to fx volatility.

Another way automation can help is through direct integration of your accountancy software with banking or FinTech platforms. This arrangement will help you better understand your treasury data and streamline your cash flows in different currencies, while supporting sustainable growth.

3. Break down your treasury costs

Understand what fees you pay and when. Many businesses still use a traditional FX provider, not realising they get charged a premium for their FX. These costs tend to be “hidden” or come in a so-called spread.

In the same way, it is worth reviewing your business travel expenditure, in particular credit card costs. Many of those will come with hefty FX charges and admin processing fees when using them abroad. Very often that amounts to an extra 3–5 per cent of the transaction value.

It is worth looking into prepaid multi-currency cards. Highly secure and accepted pretty much anywhere in the world, they allow you to hold a good number of currencies to suit your needs.

With a bit of forward planning, you can load the card with funds in the required currency and spend abroad as if you were a local and avoid unnecessary fees for your transactions. They also often come with an app that enables you to track and reconcile your expenditure in real time.

4. Maximise your use of hedging tools

In addition to the multi-currency account I have already mentioned, forward contracts are very strategic and useful. They enable you to lock in an exchange rate in your preferred currency for up to two years, which can be used for future purchases. Typically, forward contracts require a securitisation deposit of 2–5 per cent, which does not tie up your cash flow yet gives you certainty in the medium to long term.

Set a realistic internal target currency rate when budgeting, analyse the current market conditions to gauge potential fluctuations and their impact on your profit margin. For example, knowing the trading range for GBP/EUR has been 1.14–1.17 over the past three months, it is highly unlikely that within the next six months that average will rise by 5 per cent allowing you to buy Euro at 1.2250. And remember, markets move down, as well as up.

Minimise the hit to your profits. Give yourself flexibility by hedging a proportion – maybe 50 per cent of what you may need. That way you could take advantage of the rates if they go up.

5. Have you tried FinTech?

While it is so easy to default to established relationships, it is important to review them from time to time to make sure you use the most cost-effective and efficient options available.

Surprisingly, almost one-third of businesses still believe high-street banks offer a competitive exchange rate, while nearly a quarter do not consider a specialist fintech company as a cheaper alternative, missing out on significant savings and solving operation inefficiencies.

Technology can streamline and speed up your payments, and often for a fraction of cost you used to pay. For example, automated currency rate tracking helps you obtain real-time quotations, allowing you to respond to currency market moves instantaneously.

In addition, AI and machine learning in the forecasting process can play a part in mitigating FX risks by helping explore different scenarios and stress testing your exposure to currency volatility.

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