A closer look at how finance teams are mastering FX management to conquer the boardroom.
We are fortunate to live in an era of data and technology that has advanced almost every aspect of our lives. Connecting with our loved ones on the other side of the world in seconds or receiving instant insightful suggestions of what to buy online is now just an expectation rather than a thrill. So why is it that businesses are starved of data when trying to make informed FX decisions? Most finance teams are fighting two prominent FX battles; the external forces of volatile markets and the internal battle of appeasing or convincing the board that ‘it’s under control’. At Birchstone we believe companies have the right to access the stark data and intelligible reporting to connect their board to the risks and opportunities that are inherent when trading or investing internationally.
In this article we study how finance teams are beginning to turn the tide of sketchy information and wonky strategy. We explore, how to enable boardrooms to finally control one of the largest risks of so many organisations, FX, and how they are slowly but surely turning it into a strategic advantage.
Establishing clear goals with FX management is a critical step that so many companies fail to address before sleepwalking into an inappropriate product or panicking to trade against the backdrop of volatile markets. For most, the priority will always be to protect risk and benchmark that against a budget rate. However, factors such as time management, accounting implications, performance vs market rate and general governance often do not get the scrutiny they deserve. Only by pinning the shared objectives between finance and management, ensuring they are in sync with business objectives, can harmony emerge, at which point companies stand a chance of alignment in the board room. Trading on their terms, no one else’s.
The reason FX is such a sensitive subject for so many companies is that it has a direct relationship with financial performance. However, too often a disconnect is created between the FX risk and business strategy without a deep understanding of what FX management means for the bottom line. We are witnessing a surge in appetite to equate client’s FX risk management with financial outcomes, allowing finance teams to strut their stuff in the boardroom when it comes to quantifying their performance. As an example, side-stepping the tendency to only talk about the nominal exposure and instead focusing on how that requirement equates to potential pounds and pence variance on the company’s bottom line, creates a much richer dialogue. At Birchstone we’re going the extra mile to speak to clients in their language, providing them with simple analysis to surface the true risk to their business and how they can manipulate this through custom built strategy to take full control. If companies can create the clear and intuitive link between their FX strategy and the bottom line, it will always steer stakeholder conversations towards winning outcomes.
It may feel familiar (and uncomfortable) that we hear so often that boardroom conversations on FX can imitate economists conjuring up their latest forecasts. If most of the time the aim of the game in FX risk management is to remove market risk then we challenge the wisdom of the need to worry about market forecasts, no matter the size of the institution they’ve come from. To achieve results commensurate with the company’s risk profile and financial objectives, we believe there needs to be broader influences on FX decision making that can be interpreted in a quick and digestible format. For years the unanswered question in boardrooms across the country has been “what is everyone else doing?” Alongside a range of perspectives, our regular peer data being shared with clients means emotions can be left at the door and the loneliness of FX management extinguished. Data-driven decisions wrapped in clear and simple FX strategy will allow finance teams to be truly entrusted to do their job.
For far too long clients have felt too reliant on the market expert they’re talking too. Some are trusted, many aren’t. Clients want some independent views and the answers to the following questions: What are my peers doing? What hedging products are other companies buying? When are they buying? What rate do they budget off? So many questions which can now be answered giving companies the much-needed perspective around their decisions.
As we allude to above, one of the biggest challenges our clients face is the ability to communicate their approach to FX risk management in a slick manner, without it becoming a full-time job. There is an uprising in the FX industry to fill the void that finance teams are experiencing here. Regular and consistent reporting, that can be leveraged and personalised at a click of a button is a key influence on the future of board room discussions on FX, catalysed by stress testing and regular reviews to ensure it will create assertive actions as opposed to passive reflections. At Birchstone, we’re in our client’s corner to help them prepare and conquer their board meetings with data and reporting that makes the FX review a moment to galvanise rather than dread.
The more complex and diverse the corporate world becomes the more it creates the necessity for the FX conversations in the boardroom to keep up. As an example, taking the ownership structure into account will have a major impact on the approach to FX risk, whilst astronomical freight rates have changed the complexion of what contributes to a company’s FX exposure. Having the right strategy, dialogue and reporting are the key ingredients to having meaningful and progressive conversations on treasury risk in the boardroom. Importantly, alongside this, in the modern world of hyper-service and connectivity, external expertise should never be too far removed to bind the company’s strategy, market risk and execution, together to reach the right outcomes. For stretched finance teams we believe having a partner like Birchstone, designed to be an extension of their team, enables them to keep one step ahead of the market and their competition even in the most volatile markets and business conditions.
In a post-pandemic world where the margin for error in business has never been smaller, we believe data-driven decisions, accompanied with connected reporting and expertise are essential in FX and treasury management. With that, we stand a chance of banishing emotive and ill-informed decisions of FX to the past, allowing finance teams to operate with a level of governance and strategic intent that any board would be proud of.