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Aug 18, 2021 | Risk Management

Cash Flow Strategies give your Business a Global Edge

How a focus on currency risk management can give companies a competitive edge and protect cash flows.

Cash flow strategy

Cashflow is the oxygen that keeps businesses alive, and all business owners know if the oxygen supply fails, it can be terminal. It is essential to keep a close watch on transactions, with real-time information at your fingertips. The golden rules of managing cashflow are well-documented and include:

  • Understanding the timing of deliverables and receivables to help maximize all available discounts or opportunities
  • Minimizing the amount of cash tied up in idle inventory
  • Addressing risks cash flow risks to help protect your profitability.

Managing your working capital can be complicated when trading overseas. Businesses that export goods from the UK find that, regardless of whether their customers pay on time, receiving multiple payments in various currencies from different countries can generate liquidity and cashflow problems.

Fluctuating currencies can eat into revenue and, subsequently, the bottom line. Another unfortunate reality is that businesses with overseas operations can be subject to costs and inefficiencies due to having multiple bank accounts in different currencies and different countries.

Setting a strategy to manage foreign exchange risk and its role in the size and timing of payables and receivables, and appropriately managing your inventory and receivables to account for currency fluctuation can help guard against these issues. Currency risk management is an integral part of any international supply chain strategy, and should be a core part of any business plan. A well thought out approach to managing currency risk can provide better visibility of future cash flows, certainty that profit margins are protected from adverse rate movements and efficiency in reacting to unforeseen events, allowing you to retain focus on your core business and remain a step ahead of your less well-prepared competitors.

Four cashflow tools for foreign exchange

There are four useful tools which can be employed when creating a risk management strategy. They all mitigate currency risk and protect cashflow, but in slightly different ways. These are:

Internal Hedging

If you have both incoming and outgoing payments, it is possible to net incoming against outgoing cash flows to help reduce the amount of currency exposed to fluctuation. The downside of this approach is that timing issues can make it impractical, replacing currency risk with another kind of uncertainty.

Forward Contracts

Forwards are a basic hedging tool that let you lock in the current exchange rate for a set period of time. This provides exchange rate certainty – you know exactly how much you will pay - and protects your profits against adverse rate fluctuations. Depending on your business needs, forwards can be very simple, or can be combined and structured for more complex transactions. Of course, rates can move up as well as down, and regardless of where the spot market is at maturity, you pay the price agreed at the time of booking. What forwards give you is certainty, enabling you to budget and forecast accurately.

Vanilla Options

If you want to avoid the risks but still enjoy any upside in rate movements, you can choose a vanilla option. This allows you to lock in an exchange rate to protect your business against negative shifts in currency movements, while maintaining the flexibility to benefit from any positive market shifts. This does require you to pay an upfront premium, but means you may benefit from an unexpected reduction in costs or increase in revenues.

Structured Options

A structured option is similar to a vanilla option. It allows you to book an exchange rate to protect your bottom line while maintaining the ability to participate in favourable market moves up to a certain point. Unlike a vanilla option, there is no upfront premium required, but depending on how the option is structured, there may be limits to how much you benefit from a favourable movement in rates.

It is important to remember that Forwards and Options FX hedging products are derivative products which involve risks due to the volatility of the FX markets. If uncertainties concerning your company’s risk management remain, it may not be appropriate to enter into contracts with these financial instruments.

Work with an expert you can trust

Each of these tools has its advantages and disadvantages, so it is important to talk to experts when creating an overall risk management strategy for your business. At Western Union Business Solutions, we work with thousands of companies around the world to develop tailored cashflow strategies that really work.

We have created a four-step approach:

Step 1

We use our forecasting technology to understand your projected foreign currency exposure.

Step 2

We team you up with one of our risk management experts to define your short and long-term business goals. They will help you to understand the currency market and how to protect your budget rates or secure your ideal rate of exchange.

Step 3

We work with you to build a plan, introducing our hedging products if we believe they will be of benefit. We’ll find the right combination to help you manage exposure, contain currency costs and protect your profits.

Step 4

We help you execute your plan using the right hedging tools to meet your goals and regularly assess performance.

We can help you manage your cash flow more efficiently. We provide transparency and a bird's-eye view of your global payments so you know immediately where funds are. We can also help you avoid the problems of foreign currency bank accounts. With Western Union’s Holding Balances solution, you can store incoming payments on a free of charge account for up to 90 days. This gives you more control over your funds, more flexibility to secure favourable exchange rates, and the ability to make same day payments, thus lessening currency risk exposure.

Western Union Business Solutions

At Western Union Business Solutions, we are trusted by more than 60,000 organisations to move money around the world. We have an extensive global network, spanning 200 territories and 130 currencies, and an in-depth knowledge of local markets and compliance.

If you are looking for world-class cross-border payments services, or counsel on cash flow strategies and how they could help you, please contact our partnerships team at partners@westernunion.com. We’ll be more than happy to talk about how we can help you manage your international transactions.

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