Protect your Profits with Cash Flow Visibility & Risk Management

Cash Flow Visibility & Risk Management

FX volatility – a risk for corporate earnings

FX volatility can negatively impact corporate earnings, leave the bottom line of a business in bad shape, and ultimately diminish shareholder value. But there are ways to mitigate the problems caused volatility and turn it into opportunity.

As a component of FX and liquidity risk management processes, cash flow forecasting can be the key to preserving corporate earnings and result in greater economic value generated offshore.

Put another way, when organizations neglect to have cash flow forecasting as part of a broader set of FX and liquidity risk management initiatives, it jeopardizes the value of future sales revenues in non-functional currencies. This locks in the cost of goods sold and may impact restated earnings.

    FX risk is now a key driver
    of corporate earnings volatility.

FX risk is now a key driver of corporate earnings volatility. Hedging earnings has become even more critical given the increasing share of profits coming from overseas.

While the majority of multinational corporations hedge to varying degrees, those that don’t see FX volatility as a threat have a substantial impact on their earnings. Now more than ever, there is an increasing need for those businesses to review their risk management practices and policies.

Effective cash flow forecasting

Currency hedging programs aren’t new and there are many benefits to having one. In the face of FX volatility, a solid hedging program can offer:

  • Protected value generated from commercial activity offshore
  • Enterprise-wide visibility over future cash flows
  • Anticipated currency positions needed as a basis for the program’s effectiveness.

Regardless of industry or geographic location being considered, there are a number of best practices to consider. Here two of the most effective:

1. Circumvent structural complexities

Having accurate and timely visibility over a consolidated actual cash position is the first step towards preparing a forecast. Mobilizing cash to “Header Accounts” through automated sweeps or manually through wires allows Treasury to view the consolidated actual cash position through the minimum number of accounts. This helps avoid structural complexity and inefficiencies, which may be hardwired into some corporate financial management ecosystems today.

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Where these liquidity structures are in place, the header accounts may then be included in the aggregated forecast cash flows.

Next, overlaying the actual cash positions with forecast data (for example, pertaining to AP and AR and other booked transactions) from ERP systems and then overlay that with any large future episodic cash flows not contained within the ERP such as expected flows arising from Tax, M&A, and capital expenditure. All this requires close liaison between Treasury, Tax, Corporate Finance and other parts of the organization.

2. Adopt multiple methodologies

There is no silver bullet with respect to preparing the forecast. Multiple methodologies are often adopted depending on flows being forecast, frequency of reforecasting (cycles) and forecast horizon being considered. Recognizing that business cycles are not linked to a financial year, it is now recognized that a more frequent rolling forecast — versus, a fixed financial year budget — is the more effective basis to manage liquidity and FX risks.

Forecasts prepared for the purpose of managing these risks should be realistic projections underpinned by valid business and economic assumptions as opposed to commercial targets, which can be more aspirational. The frequency of the rolling forecast should not be too rigid either. That is, the more volatile the environment, the more frequent a revised forecast is required. 

Learn more about FX risk and corporate payments here or schedule a chat with one of our payments specialists at this link.