How can you protect your global business from FX exposure?

Cross-border businesses face a complex monetary dance, with incoming and outgoing transactions in various currencies. When a business wants to expand internationally, transacting internationally is inevitable, but it comes with a significant amount of cost and efficiency considerations - sending and accepting payments in different currencies without having accounts in those currencies can be a tedious and costly endeavour, increasing the risks associated with foreign exchange exposure. In particular, this may become a concern as the business scales and the volume of cross-border payments increases. One of your financial priorities as a CFO or treasurer should be minimising foreign exchange exposure and protecting your business from its volatility. As we delve into this article, we will examine what exactly is FX exposure, how it can impact your business, and the strategies to manage it.

Foreign currency exposure is the risk associated with financial transactions in different currencies. Although it may seem like everyone deals with multiple currencies these days and dealing with foreign suppliers and customers in their domestic currency should not be a problem, statistics tell a different story. During the third quarter of 2022, European companies experienced a 68% increase in FX-related headwinds, while both European and North American corporations experienced a $47.18 billion loss as a result. According to the Deloitte Biennial Global Corporate Treasury Survey, over 8 in 10 respondents reported that reducing those costs was challenging due to lack of visibility into FX and reliability of forecasts.

The ebbs and flows of currency values are one of the biggest reasons why an international business should keep a close eye on their FX exposure - volatility in the markets and currency movements have an enormous impact on cash flow and profit margins, so even small inefficiencies in payment and accounting workflows can have a significant impact.

Shifting Values of Foreign Revenue and Expenses

Foreign exchange rates fluctuate, so revenue and expenses in foreign currencies will always differ after budgets, contracts, or transactions are booked. For example, a business may increase their purchasing power when dealing with a weakening currency during a purchase. On the flip side, a weaker home currency can inflate the cost of materials and services sourced from other countries. For businesses with foreign sales, fluctuations in home currency strength can impact profits despite consistent sales volumes.

Challenges in Planning and Management

With such fluidity, it is difficult to get an accurate and real-time insight into expenses, cash flow, and revenues. In the long run, heightened FX exposure may hinder growth and expansion by making medium and long-term planning and forecasting more challenging. Moreover, FX fluctuations not only impact the bottom line but also create a perception that the company is poorly managed, affecting relationships with investors, suppliers, and borrowing eligibility.

To manage FX exposure, many businesses open multiple bank accounts in trading currencies. This may prove counterproductive for two reasons:

With more banking relationships you replace ineffective FX conversions and fees with extra costs and hassle associated with dealing with multiple institutions.

The data is spread across multiple bank accounts, and, for larger companies, also across subsidiaries and groups. With no single source of truth and no visibility across all financial data, errors are likely to occur, and information is likely to be inaccurate and outdated. Consequently, managing FX based on inaccurate data brings unwanted outcomes.

If opening multiple bank accounts with multiple institutions is not a solution, what is the solution then?

Managing FX exposure is an essential treasury task. To stay competitive in the global market where margins are tight and markets are volatile, businesses must improve their processes and reduce FX costs through strategic activities:

Risk Analysis and Goal Setting

Identify all currencies your business is exposed to in your supply chain or sales and set goals to minimize exposure and associated costs. This can be done, for example, by defining target exchange rates.

Trading Strategies

There are a few ways to minimise your FX exposure through the way you conduct cross-border payments.

Operate in your domestic currency or increase prices to pass on risk to suppliers and customers.

Consider trading in local currencies.

Use commonly agreed-upon currencies like USD or EUR.

Leverage technology through trusted partners

Businesses partner with trusted banks for their expertise, but modern-day businesses need technology-driven solutions to improve the efficiency of cross-border payments and other aspects of financial operations such as accounting and control.

Consider partnering with a Treasury Management System provider who can not only provide you with a complete overview of your cash flow across all currencies but also give you the right management capabilities, such as:

FX accounting through seamless integrations with ERPs and accounting tools.

Cross-border payment capabilities in multiple currencies.

Automation of payments and accounting for real-time insights.

Network of banking partners to gain access to new currencies and banking products.

With the Fyorin platform, you will be able to access 100+ currencies across 200 countries, unify treasury, and streamline cross-border payments on one platform, thanks to its powerful global network of financial institutions. As your trusted FX partner, we protect your business by:

You can pay and receive payments in desired currencies using virtual accounts with local IBANs and eliminate costly corresponding banking.

Local payment routes facilitate fast, efficient, and transparent payments.

The ability to manage multiple banking relationships from one platform - streamline compliance and commercial processes to save time and money.

From one dashboard, you'll have a complete view of your treasury across all currencies, bank accounts, and subsidiaries.