Our data shows that 30% of our client’s attribute meeting their budget rate as their key objective. They are essential to foreign exchange (FX) strategy and treasury management.
While there is no simple answer for how to set a budget rate effectively, multiple methods can be used, and different rates can materially impact a business’s bottom line.
Budget rates should be well-researched, data-backed, and considered within the overall FX strategy and business model. We recommend analysing multiple data points, including budget rate methods and peer/industry benchmarking. Budget rates should be reviewed and revised at least annually. There is an art to setting a viably commercial rate with enough wiggle room from current rates.
With benchmarking, best practice stipulates that you should be specific to your business, as this will produce more accurate data. If you are budgeting at rates wider than your peers, there is a risk that your pricing might be less competitive. If pricing is too tight to market rates, you should question whether it is realistic and sustainable. Benchmarking against your peers is not always straightforward, as accessing reliable data is often challenging.
In the Birchstone Benchmark example below, we have averaged client budget rates* over the last six months (Mar 23’ to Sept 23’). As you will see, there can be a material variation in the rate compared to other methods. Within the Birchstone peer data, we segment based on various data points, including company type, size, and industry, to provide our clients with the richest data possible.
Setting a budget rate and utilising hedging strategies is a method of managing currency risk and reducing market exposures. It is a complex process that carries risks. Always seek professional advice from a qualified FX expert to navigate the intricacies of this risk management method.
The materials and data noted in this document do not constitute legal or professional advice. The prices displayed in this document are indicative prices and based on historical figures. Prices are subject to change based on external market factors such as currency rates which are not within the control of Birchstone Markets.