May 21, 2020 | Risk Management

Treasury in Testing Times

As lockdown is tentatively relaxed, thoughts and much media commentary have inevitably turned towards how, when, and even if things will return to normal.

By Alex Lawson, Hedging Director, Western Union Business Solutions

There may well be no return to the status quo ante, for better or worse, so any business must plan ahead for all eventualities. The government’s recent dossier set out a potential roadmap, but progress could be stymied at any point by another flare up of the virus. So, while welcome, it can only do so much to reduce the uncertainty faced by businesses in the UK.  As such, any plan will need to consider a range of potential outcomes based on probable impact to your industry. 

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Assuming you are back in operation, or planning to re-open soon, what percentage capacity will you be able to operate at if your staff need to work further apart or to take other protective measures? How will the same restrictions impact your suppliers who may be producing less as a result, or your customers who may be buying less? What will be the subsequent effect on lead times in your supply chain? Unfortunately, we still have no idea how long social distancing measures might last. So, with the government report mentioning that a vaccine may never be found, any plan should account for a potential long-term impact.

With regards to financial considerations, are you able to buy more cheaply with demand low, or are your goods already more expensive due to a paucity of supply? Have your overheads fallen or increased? Do you have staff on furlough or are you counting the cost of implementing social distancing and protective measures for those now back at work? Do you need to consider the future cash flow impact of deferred rent or VAT? There are many such factors your plan will need to take into account.

Amidst all this uncertainty, do not forget currency exposure. Although markets have been calmer in recent weeks, there is still the potential for a great deal of volatility and with that the opportunity to trade at the right time as well as the wrong time. Some of the potential costs listed above can be absorbed by getting the right exchange rate and some of the uncertainty can be mitigated by ensuring your strategy is sufficiently flexible and adaptable to changes when necessary.

In our opinion, your FX risk management “to do” list could look as follows:

  • Get visibility of your sales pipeline and be realistic in how much that could grow in the coming months.
  • Simulate the effect of different exchange rates on your profit margins based on higher/lower input costs or higher/lower sales revenue.
  • Set budget rates on which to sell/buy and place market orders if the right level is not available today.
  • Align your hedge strategy with your expected capacity – eg if you’re likely to be running at 50% capacity, the amount you hedge should be adjusted accordingly, whilst still taking into account risk appetite.
  • Learn lessons from the past couple of months. How did your existing risk management strategy hold up under such extreme circumstances? If you could go back, what would you change? More hedging, less hedging, different products, different rates?
  • Stress test your strategy. Hindsight is a wonderful thing, but with science and history telling us there could be further waves of the virus later this year and next, are you confident your plan can adapt to ensure it is robust enough to withstand future shocks without leaving you regretting being too cautious should the recovery prove to be V-shaped after all.
  • Cash flow is king – where possible secure your rates in advance to ensure you have visibility of your cash flows and do not have cash tied up where it is not needed.
  • Think of longer-term needs. In the near term, business may be limited, but as the economy is gradually revived, plan for growth. Don’t neglect planning for Q2 2021 just because Q2 2020 is looking dire.
  • Above all, be ready to move when the opportunity presents itself. Know who will do what and get any required authorisations in place, particularly if this is likely to be harder than normal where working remotely.

It is important to remember that hedging products are derivative products which involve risks due to the volatility of the FX markets and may not be suitable for every business.  Engage with an FX specialist who has in-depth knowledge of these products, especially how and when to employ them and what the benefits and consequences could be for your business. Western Union Business Solutions has the capabilities to help you manage currency risk and help protect your profits. Our experts can help you build policies to deliver visibility, confidence and efficiency for your senior leadership as well as Finance, Treasury, Sales and Operations. In addition to in-house analysts and dedicated account managers, we have a team of corporate hedging managers who should understand your requirements and business objectives, then work with you to design and implement a bespoke risk management strategy.

Contact an FX solution specialist now