Keep Watching the Cash II: Volatility in Global Currencies

Nearly two years ago, we addressed investment and policy considerations as volatility in the financial markets reached its 2008 apex. (To read "Keep Watching the Cash I," please click here.) Now, with Spain and Greece dragging the European Union into a new credit crisis and the Euro rapidly dropping in value, it is important to revisit the theme. Even if your bottom line has not been immediately affected from the recent decline in markets, now is the time for companies to fully assess currency exposure and minimize risk. The overarching goal is to ensure a carefully evaluated and developed regime of hedging policies.

Because there are countless factors to consider when it comes to currency exposure, here are a few thoughts on building a strong plan:

Hedging should be an ongoing process, not a reactionary undertaking. Work continually to identify your biggest areas of exposure, and formulate your currency risk management policy from there. A solid determination of budget rates and goals is essential as a blueprint at this stage, as your hedging strategies are bound to change over time. Ultimately, as you execute, make sure to have a set plan to evaluate the results and adjust as needed, thus recurrently identifying your riskiest exposures.

Focus on economic performance and cash flow. Insure that your hedging regime is aligned with your company's overall goals. Certainly at the outset of any hedging strategy for growth companies, the recommended primary objective should be to minimize cash risks rather than to maximize the accounting profits.

Hedging need not be speculative or risky. To the extent that your currency exposures are potentially large and extremely complex, consider taking on the advice of a neutral professional to measure and design an effective program with your company's goals in mind. This sort of independent groundwork from an expert in your particular region or industry will prove essential as you work to achieve new growth initiatives.

Work to understand f/x movements and how these might affect your suppliers as well as your customers. Too often, management teams believe their cash flows are "naturally" hedged because of inflow-outflow equality for a particular currency. This most often proves false, as suppliers are often hit by such fluctuations and quietly pass the expense directly to you, thus undercutting what might have been safe EBITDA projections.

Place your hedge at a proper level that provides break-even cost certainty with room for a normal profit. A hedged position below break-even might not achieve an objective of de-risking the f/x movements, and a hedged position to earn substantial profits might prove to be too expensive.

As a best practice, we recommend that CFO's set aside time each quarter at a minimum to address currency exposure, ensuring that results are properly evaluated and hedges are properly adjusted to meet your company's goals.

If you would like additional information in the areas of currency exposure, please contact your GA team or John Jureller of our Resources Group.