The Key to FX Mastery

Growing businesses are going global. And, because of this, the role of currency conversion and FX management is becoming increasingly critical to the financial operations of an organization.

So what are the biggest challenges to effective FX management? How can businesses manage this work? And what are the scalable approaches that will help you completely master FX?

You and Your Monetary Conscience

Traditionally, businesses set up currency accounts in order to simplify payments when operating across different countries. These local currency accounts are used by finance organizations for a variety of payout situations, including:

• Payroll and commission payments
• Vendor, supplier, and service provider payments
• Expense reimbursements
• Funding of local subsidiary bank accounts
• Partner and reseller fees
• Local tax and regulatory payments
• Beneficiary payouts
• Licensing and royalty disbursements

While large organizations often have an in-house treasury function that manages multiple accounts, trade currency, and bank relationships, fast-growing and mid-sized businesses find that this isn’t always feasible or cost-effective.

These back-office tasks can take senior finance leaders out of their normal day spent strategizing and analyzing and pull them deep into the trenches of foreign bank management. Additionally, this is a job that needs to happen quickly—shortfalls of cash management can require businesses to buy currency at a spot rate to meet payroll. But if your bank is 18 hours ahead, you’ll have to wait for them to open in order to wire the funds from the primary account to the regional accounts.

The results can be disastrous. Failure to pay can cripple the regional business unit, particularly as the business is trying to gain traction and establish relationships. This highlights the importance of effective currency management processes, not only from the finance side but from the company’s ability to conduct business.

The Biggest Currency Challenges

There are four major problems that affect an organization’s ability to execute effective FX management strategies:

• Manual Labor – Staffing for manual processes is problematic. It’s not a big enough job for one person, which means someone has to repeatedly carve out time from their core job to manage it. Because of the sensitive nature of transferring funds (including cross-border wires), this task is often the responsibility of a senior finance leader—a CFO, controller, or VP of finance. And it’s not a job that maximizes their time or skill set.
• Bank Relations – When dealing with foreign banks, there are general layers of complexity involved. This includes communication lags around time zones, weekends, and holidays. There may also be language barriers and miscommunications. Some banks may also have service fees that sit on top of conversion fees for both the payee and the payer.
• Immediacy – Buying spot rate conversions is often necessary to meet a shortfall on a tight timeline. Currency conversions need to have an “on-demand” mentality at times, making it harder to layer on a strategically-minded approach.
• Conversion Fees – The cost of converting funds is often at the spot rate, because of this on-demand nature. For an individual business, those fees may not be the best in the market—over time they can add up.

Finding a Scalable Approach

The key to successfully scaling is to tighten the bond of currency management with accounts payable—establishing centralized payout accounts. For example, if a company is using an automated global payables solution they would fund a single account, easily transfer funds between each of their entities, and send money to payees in local currency.

A multi-FX currency management service that ties directly into an automated AP solution offers these key benefits:

• Single Funding Point – Headquarters is the primary treasury source for all payments and users can have the solution transfer funds from one account to another and convert to a target currency.
• Direct Connection to Payout Accounts – An accounts payable solution with multi-entity features provides a single instance with segmented accounts for each business unit, subsidiary, or entity.
• Better Rates than Independents May Often Achieve – By leveraging a solution with a high volume of FX buys from its entire customer base, you can leverage lower rates than many businesses may receive from a bank on their own.

By keeping tabs on your monetary conscience, understanding the biggest currency challenges today, and finding a scalable approach for your business, you’re one step closer to complete FX mastery.

Ibrahim Rifath