5 common misconceptions CFOs have when discussing FX
Updated: Nov 6, 2020
We have been groomed for hundreds of years to think that the only way for us to manage transactions between two currencies is by using one of the behemoth banking institutions and that FX is far too complicated for the layman to handle. This article will look at some of the common misconceptions that every CFO should be aware of when dealing with FX within their firm.
“My bank does that...”
One of the most important things to understand is that the payment landscape has changed and there are now more ways than ever to send payments efficiently (and cheaper!!) around the world. What's more these other providers actually value the business and are willing to explain and educate CFOs on FX costs and hedging solutions which can help grow their firm internationally. Banks are important cogs within the payment mechanism... but seriously there is literally no reason to send a check anymore.
“I have multiple banks and brokers that I already work with...”
Some CFOs make the leap to use a specialist for their FX or maybe they inherited banking relationships through acquisitions, maybe Larry took them to play Winged Foot. The truth is unless a CFO is handling over 100 different currencies then they really don't need more than 2 providers. An FX advisory firm can assist here and help wade through the providers out there and select the perfect match for their firm, whilst negotiating rates and hedging limits.
The best part about this is that an FX advisory firm will make money whilst saving you money. A CFO can get expert advice for no extra cost.
“I send USD to my manufacturer...”
Now, this doesn't need to be currency-specific, but USD has strengthened over 20% in the past year against a variety of currencies (except for the BRL, which was over 40%!). This means the purchasing power should be 20% stronger in certain countries. Paying in USD stops firms from taking advantage of these moves. Certain suppliers are willing to offer discounts to their clients if they pay in their local currency. We always suggest getting quoted for the service, product or asset in both USD and the local currency. This will ensure you are able to take advantage of any favorable weaknesses in the currency you are buying. To be a truly global business a CFO needs to be aware of its local currency value.
“I tell my overseas clients to pay me in USD...”
Any company that is trying to attract overseas clients needs to be as accessible as possible. Some clients will insist they are paid in local currency (for the same reasons above), if your company can’t, a local competitor can.
An FX specialists work with CFOs and their teams to set and protect their budget rates ensuring that they maximize the home currency returns on overseas sales.
Having the ability to receive payments in local currency will only make the firm more attractive to international clients and investors, and in this extremely competitive landscape, any edge that can be gained should be taken.
“Hedging is complicated, I'm just a small business...”
One of the biggest reasons for firms electing not to hedge is the misconception that it is too complicated and therefore it is immediately deemed as too risky. It may shock many, but the vast majority of financial service professionals do not have experience with FX risk. The fact is that if your firm is now a global business then you need to be prepared to operate like one. This doesn't necessarily mean that all firms should hedge everything right away. We just ask our clients to be informed as to why they have decided not to hedge and not just because their accountant may have to do some extra work. If FX makes up a large portion of the revenue or costs, then it would make sense to sense to understand and quantify your FX risk and look into ways to hedge it.