If your company trades with suppliers or customers in other countries then you likely have to deal with foreign currencies in your business and you likely have currency risk hiding in your finances. Dealing with foreign currencies and currency risk can range from a mild annoyance to a business-critical function depending on many factors in your operations.
As a thought experiment, ask yourself - if currency exchange rates moved dramatically, could this impact your business’s profitability? Or would this cause significant operational pain--like needing to adjust pricing to all your international customers or renegotiating contracts with suppliers?
If you answered yes, then your business faces currency risk. Generally speaking, currency risk comes from having costs in one currency and revenue in another. Differences in the timing of paying costs and collecting revenue exacerbate the problem.
In practice, currency risk comes in many shapes and sizes:
The extent and importance of currency risk vary depending on the company’s business model. In 2020, amidst the global Covid-19 pandemic, exchange rates were more volatile than in recent years. For example, the USD/GBP exchange varied by as much as 20 percent. Through most of the pandemic, USD weakened to GBP.
If a British company collects exclusively USD revenue and pays exclusively GBP costs, then it could have realized as much as 20 percent loss in GBP revenue during the pandemic. A simple example will illustrate.
Most real-world examples are not so clear-cut and have more moving parts, but hopefully, this illustration makes the principle clear.
To completely understand your currency risk, you’d need to:
But is solving for currency risk even worth it? Perhaps you’ve been doing business without managing your currency risk for many years and you just view this as a cost of doing business. And isn’t it true that I’ll win on exchange rates as often as I lose--does it all balance out in the end?
Whether or not solving currency risk is worth the effort depends on your business. Some questions to consider are things like:
Transacting in multiple currencies brings currency risk. The choice to manage this risk or leave it unmanaged is up to each company. Managing currency risk takes some time and effort, but can protect the business from currency fluctuations. Choosing to leave currency risk unmanaged is easy, but moving exchange rates can impact the company’s profitability. You’d likely avoid a contract with a supplier that may-or-may-not have a 20 percent fluctuation in the price based on the day of payment. But that’s exactly what we all do without thinking about it when we agree to take on currency risk.
If you have a small amount of money at risk and you can weather potential losses, sometimes it makes sense to do nothing. However, most firms can benefit from being more proactive. The key is not to let a small problem command a large-scale solution.
The fact is that almost all large companies have professionals that manage currency risk. Large, international companies often have millions at risk and value predictability in costs and revenue. They can afford to hire or work with risk professionals to protect their businesses. For large-scale problems, they work with a bank or an FX broker on a large-scale solution with financial projections, risk analysis, and complex hedging strategies.
However, most smaller businesses don’t have the time or resources to commit to even understanding where currency risk is hiding in their operations--let alone putting together packages of financial products that would help mitigate these challenges.
Bound aims to make this entire process easier. We’re developing products to help businesses more easily identify currency risk and then mitigate that risk. Our goal is an automated and integrated solution that provides the benefit that large companies get from professional risk managers, but for companies that don’t have the extra time or money--whatever the currency. Best of all, with Bound, there is no finance degree required.