Are my foreign cash flows big enough to start hedging?
Seth Phillips | CEO | Bound
One of the most common questions we get here at Bound is “At what volume of foreign currency flow does it make sense to start hedging?”
Obviously that isn’t a question we can answer for another firm. A company needs to answer that for itself.
What I can offer as a quick TL;DR is this: our smallest customers generally start thinking about using hedging to make foreign cash flows more stable and predictable when they start to have foreign revenue or foreign costs greater than $100,000/month. Most of our customers do much more than that, but that’s when we start to see questions start to come up.
For Bound, we’re a USD-funded company and report our financials in USD. We earn revenue in all sorts of currencies and our operating costs are primarily in GBP and EUR. We’ve used our own product from day 1.
Now, that’s not a fair comparison for most other companies since this is all we do everyday. Also, it’s common for companies to reach out to us after a shocking currency event that skewed their finances. So this makes us keenly aware of what can go wrong when companies just YOLO their currency risk and then get surprised when they get surprised. ;)
But, here are some discussion points that we talk to customers about when this question comes.
There seems to be a trend in tech right now that is rewarding stability and predictability. We’ve moved on from the “growth at all costs” of 2020 and 2021. Investors and finance teams that we talk to today want to have predictable projections and they want to hit those numbers. How important are stable and predictable foreign cash flows to your overall projections?
Could a 10% loss in foreign revenue have a material impact overall?
Could a 10% rise in foreign costs have a material impact overall?
I use 10% as a placeholder here. You might want to consider the volatility of the currencies you deal with. Currency volatility has been on the rise over the past few years and so that means this has become a bigger issue for companies - especially those that are completely unprotected.
Think about proportions.
Is this a million-dollar problem? If you have significant foreign cash flows and fluctuations can cause millions in unpredictable fluctuations, then think about proportional investment to solve the problem. How much would you spend to help other areas of the business be more predictable? This doesn’t mean you need to spend a lot of time, but is the potential value enough to spend proactive time on?
Is this a hundred-thousand dollar problem? If your currency risk is in the 6 figure range, then think about how much time you’d want your team to spend on a problem that size? None? 10-minutes per month? There are programs you can set up that are automated and will be directionally correct without needing to spend much time.
Ultimately, currency hedging used to be a lot of work, but we’re trying to make it easier for you.
If you’ve got a lot of foreign currencies flowing through your business and aren’t doing anything to manage your exchange rate risk, then reach out and we’ll help you understand how much risk you have.