Volatile forex markets have complicated business for all companies trading across borders. To delve deeper into the subject, Real Business spoke to a group of finance directors and analysts who are experts in managing currency risk – dealing with dramatic currency shifts on a daily basis.
Since June last year currency markets have been characterised by sudden and unpredictable shifts.
The euro has lost seven per cent against the dollar and then clawed those losses back. Graphs charting the pound/dollar and pound/euro exchange rates resemble route sheets for mountain stages on the Tour de France.
For companies that either sell into overseas markets or source inventory across borders, the volatility has brought an additional layer of complexity to doing business.
For SMEs in particular, which don’t have the luxury of a well-resourced treasury department to deal with managing currency risks, it invariably falls to the finance director (FD) to ensure that profits and cash are shielded from exchange rate movements.
At the recent FD Surgery conference, organised by Real Business, a group of finance directors and forex analysts met to compare notes on the challenges that currency changes have posed for businesses and how FDs can go about dealing with them.
- Edward Hardy, World First
- Rachel Stanhope, Ubisoft
- Scott Bushby, Rimor
- Garry Hirth, Aqualisa
- Michaela Talbot, Daxbourne International
- Edward Knighton, Sofa.com
Edward Hardy, an economist and market analyst at World First, a provider of foreign exchange services focused on serving the SME market, said one of the main challenges facing FDs was adjusting to recent volatility after a prolonged period of relative calm.
“The discussion around how extremely volatile currency markets are can be overplayed. If you take out the one-off market event of Brexit, we are actually in a period that historically is one of the least volatile,” Hardy said. “It is when you are working in a stable environment, however, that one-off shifts can catch you out and complacency can set in. If you need to hedge then it should always be on your radar and not only when there is volatility.”
Garry Hirth, a veteran FD who has worked through eight buyouts during his career, said that currency has always been an issue, but that its impact on businesses has become especially apparent recently. “If you have a letter of credit or invoice payment that falls due on a particular day then you have to pay the spot rate on that day, and that rate can be influenced by innumerable factors. As an FD, that is something you are going to worry about,” Hirth said.
Managing currency risk for the future
Michaela Talbot, who has held a variety of senior finance roles over the last two decades, most recently at Daxbourne, said the best strategy for dealing with currency volatility was to take a long-term approach.
“Currency shifts can have a huge impact on your bottom line – and you can’t pass those costs on to customers. But as an FD you can’t be a currency trader, so a successful approach to forex is all about setting out a long-term forex strategy and reviewing that strategy on an ongoing basis,” Talbot said.
Any forex strategy should be set with a long-term view on where a company will be sourcing and selling over time and also recognise each company’s particular needs.
“Changes happen in business and a good FD needs to bear that in mind. Your company may be manufacturing in Europe but then move that to China mid-year. You may have forward bought euros and then need dollars, but you could just as easily have too many dollars if you start selling into new markets,” Hirth said. “It comes down to how good your forecasts are and the foresight to anticipate any changes.”
Rachel Stanhope, the UK FD of French-owned computer game company Ubisoft, said her main focus with regards to forex was on stock levels
“Stock levels are very important. High stock levels are a positive indicator of sales, but if you hold a large amount of stock and currencies shift it gets difficult. You can hold more stock, but there is a risk of currency moving, so you need to be prepared to respond if that happens,” Stanhope said.
Scott Bushby, FD of Rimor, a specialist engineering company in the subsea oil and gas industry, said that once a FD has identified the forex risks a business is exposed to, the next step is communicate the reasons for a forex strategy to the chief executive, board and shareholders.
“A prudent forex strategy is crucial, but that doesn’t mean the FD can just go ahead and forward hedge for a long period. There are other pressures in a business and a board is perfectly justified in asking whether a long forward hedge is necessary when markets have been less volatile, or when a natural hedge forms as sales to the new region increase,” Bushby said. “As an FD you should always be asking yourself how long you should be forward hedging for, what the risk is and how that sits within the business. There is a balance that needs to be found.”
Given the different pressures within a business and the bespoke forex needs of each company, Edward Knighton, an FD with more than 20 years of experience, most recently at Sofa.com, said that it was well worth taking advice before settling on a forex strategy.
“Do use an independent adviser. If you are going to spend hundreds of thousands of pounds on a product, the fee to an adviser will be dwarfed by the savings that advice can bring you,” Knighton said. “It is well worth it. The companies selling products will know them backwards, but it is important for you to really understand what you are buying. How flexible are the draw down arrangements? How do you operate an option mid-month?”
Hardy added: “Any seller has an incentive to provide a product. The good ones are those who are totally open and transparent about their fees and what margins they could make. A good provider will always do that.”
Originating from a variety of different industries, our roundtable FDs and CFOs had some highly-valuable advice on managing currency risk – an issue that shows no signs of becoming any less relevant in our increasingly globalised business world.