May 24, 2021 | International Payments
When Every Penny Counts – the threat of Currency Fluctuations for NGOs
Every business that trades overseas is aware of the risks of currency fluctuations and how they can affect the bottom line. For NGOs, the awareness is heightened by the knowledge that every penny in the bank is the result of a precious and hard-won donation. It is essential to protect the funds in the best way possible.
Exchange rates often make headlines, but over the last few months as the shockwaves from Brexit and the Covid pandemic have reverberated through economies around the world, they have been in the news more than usual. We live in uncertain times, but life must still go on and the business of NGOs is even more essential. For many of them, responding to disaster or severe hardship necessitates making large payments, often to remote locations, and in unfamiliar currencies.
You can’t choose when funds will be needed, and there is no way of knowing how exchange rates will move on the day you need to make a payment.
The above chart shows how the British Pound has traded against the US Dollar over a 12-month period. In March last year, the spot rate fell to $1.14, but by February 2021 it reached a multi-year high of $1.42. This equates to a range of nearly 25% meaning that a payment of $100,000 could have differentiated in cost by up to £17,000 during this period. That adds up to a lot of donations, which is why a robust policy for managing payments is important. Adverse currency fluctuations can be avoided, limiting potential additional costs by implementing a currency risk management strategy.
Risk Management Strategies – tailor-made every time
Many people are daunted by the terms ‘hedging’ and ‘forward contract’, but they are simply ways of protecting your payments against movements in exchange rates. With a hedging strategy in place, you can use tools such as forward contracts to fix the rate you will pay in advance. It means that you know ahead of time exactly what your costs will be and how your cashflow will be affected.
A good foreign currency partner will work closely with you to agree a hedging strategy. Every NGO needs to protect the bottom line from currency risk, but each one is unique and they all have very different priorities, transaction volumes and business goals. There may be a need to secure the cost of ongoing staff salaries overseas, or a one-off project where a ring-fenced budget needs to be protected. Each of these calls for a different approach.
Because exchange rates can move in both directions, many NGOs choose to book only a proportion of their forecast exposure. This layers in protection as it gives them the option to purchase at higher spot levels if the rate moves advantageously. Each NGO will be working in very individual circumstances, which is why the expertise of a foreign currency partner is so important.
Choosing the right foreign exchange partner
Many foreign exchange providers have a dedicated service for NGOs. At Western Union Business Services we give free advice to NGOs as standard. We also offer Holding Balances, so NGOs can purchase currencies and store them in holding free of charge for up to 90 days.
This is ideal for three reasons:
- Should you have cash flow available to buy currency ahead of a designated payment date, you can do so and have the funds delivered into holding. This will give you cost clarity for up to 90 days.
- Holding is a cost-effective alternative to the unnecessary opening of specific currency accounts (avoiding monthly bank subscription fees and account opening fees).
- If you have incoming currency payments, rather than have them directed to an inappropriate bank account (e.g. a GBP account) where they will be subject to variable exchange rates, you can have the funds paid into our appropriate currency account.
You then have the following controls:
- A 90-day window of opportunity to secure a favourable exchange rate into GBP (so you can convert the funds when you choose to do so).
- The option to buy other currencies, which means the organisation can avoid dipping into GBP cash flows.
- The ability to make same/same payments, and so avoid the risk of a foreign exchange conversion (If you receive some USD, you can hold them, then send them out at a later date as part of an outgoing payment).
Wherever in the world you are trying to make a difference, we can help. At Western Union Business Solutions, we can deliver funds to more than 200 countries and territories in over 130 currencies. We can clear payments domestically almost anywhere in the world, minimising delays and deductions.
If you have limited access to the local infrastructure, our WU® Agent locations and mobile payment capabilities will ensure funds arrive swiftly and reliably.
We also give you increased transparency. You can easily check rates before booking a transaction so you know the exact cost in advance, and Management Information is available at your fingertips so you have a complete picture of all your transactions in real time.
In short, we offer a full suite of international payment capabilities which we know help to empower NGOs with the solutions they need to reach overseas recipients and workers.
‘At Western Union Business Services we work with many NGOs, all of different sizes and with different purposes’ says Alex Lawson, Director Hedging Products UK & Europe at Western Union Business Solutions. ‘We know how precious every donation is to them, and how important it is to have certainty when it comes to cost management and cashflow. We work closely with each one of them to understand their needs, give them informed practical help and support. We aim to deliver a hedging strategy which ensures cashflow is stable, business forecasts are reliable and transactions are better protected. Then they can focus on their mission, rather than worrying about what is happening in the markets.’Contact Us