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Why Small and Midsize Companies Focus on Foreign Currency

By Jeff Goggins
FX Risk Advisory

Growing internationally should be a challenging yet exciting chapter in every mid-market companies’ story. International business activity results in a wide range of foreign currency (FX) denominated transactional situations, all of which have costs and considerations. In order to keep the headaches, (due to inefficient processes and negative economic impacts) to a minimum, mid-market companies need to stay ahead of the curve and leverage experienced partners.

Soliciting the advice of bank partners is often the first stop in the journey, and always remains an excellent source for insight and ideas as a company grows. However, it’s always ideal to leverage more than one source for best practices, especially if the primary source is also the biggest financial benefactor of processing foreign transactions related to the business activity. Additionally, specialized FX advisory partners more commonly expand their coverage into accounting, processes, and controls associated with FX transactions.

When has an organization reached a level of maturity and economies of scale to see a beneficial return on investment from engaging with an FX advisory partner? The following list represents the FX related pain points that begin to fester as mid-market companies grow internationally. If your organization has experienced increased activity in any of these areas, it’s worth a conversation with an FX advisory partner.

FX Challenges when Expanding Internationally

Cross Border Paymentsinternational payments can be time consuming and expensive. There are many options and trade-offs for how to manage this activity. Choices and solutions expand as volume and value of payments increase.

Bank Accounts / Collections – Accepting or sending payments in currencies that are not the bank account currency can be an expensive habit to hang onto as your volume of activity grows. These transactions are converted automatically at sub-optimal spreads, negatively impacting profitability. This impact can be difficult to track. Managing foreign currency bank accounts and being in control of foreign cash requirements may be easier than you think.

Intercompany Activity – As operations expand internationally, companies find themselves more frequently exchanging currency for intercompany flows. The flows may be for larger ticket actions such as capital infusions or repatriations/dividends, or for trading activity such as invoices or royalties. Without thoughtful processes and sound policies, these transactions can come with heavy costs, a build up of FX exposures, and onerous work.

Foreign Credit Lines – Setting up bi-lateral credit agreements at foreign subsidiaries or relying on local credit lines have a time and place, but there may be better options for leveraging global liquidity. The most advanced global companies have In-House Banks, but there can be effective and cost saving options that do not require such a transformational undertaking.

Foreign Currency Transaction Accounting – It’s quite common for growing companies to start off with ineffective processes related to accounting for foreign currency denominated activity. This can be caused by ERP setups that are not ideal, or by companies using FX ledger ERP functionality to FX transactional activity. Cleaning up FX accounting processes now, can save a lot of time and frustration for the future, larger, organization.

EBITDA/Margins Risk – The value of foreign revenue and expenses will shift between the time the transactions are booked and the time when budgets, forecasts, or price lists are established. These changes in expectations can leave negative impressions to investors or impact bonuses internally. Properly articulating these impacts and creating a cross-functional dialogue can help establish awareness.

Revaluation/Remeasurement Risk – Foreign currency (non-functional currency) monetary balance sheet revaluation creates unpredictable impacts to EPS, particularly when controls around the entry of FX transactions and balances is unclear or expanding. As the foreign currency activity described above starts growing, these impacts can cause unwanted surprises. It may be time to start monitoring the gains and losses much more closely for impact to the income statement.

Learning More About Your FX Impacts and Opportunities

Across the multitude and complexity of FX risk-related challenges, there are many levers that can help corporates keep costs to a minimum while offering direct problem-solving flexibility and scalability. To remain competitive in a global market, it is critical for businesses of all sizes to assess the excessive costs originating from FX transactions and related processes, while exploring opportunities for cost-reducing best practices.

Many organizations have unknown or misunderstood FX pain points across many areas of finance and operations. Reach out to learn more about what’s available for small and midsize companies or if you’re simply wanting to understand ways to manage the impact from FX. FX Risk Advisory can help explore your possibilities. Our clients range from domestic startups just starting to transact internationally, to sophisticated global Fortune 500 companies. We provide a professional team that brings a wide span of industry and technical FX risk management experience.