How to effectively manage currency risk with a Treasury Management Solution

Cash flow forecasting methods will vary depending on the needs, objectives, and organizational structure of companies. Cash flow forecasts generally revolve around key temporal concepts.

Short-Term cash flow forecasting

Short-term cash flow forecasting serves operational management. It is crucial for the daily management of bank balances and anticipating cash needs and/or surpluses. This short-term forecasting involves monitoring and regulating available cash flows over a period ranging from a few days to a few weeks. The goal is to ensure that the company has the necessary resources to meet its current expenses on time: salary payments, supplier invoices, direct debits, and other short-term commitments. The decisions made in short-term cash management directly impact the company’s financial liquidity, its ability to meet obligations, and seize investment and placement opportunities.

Digitalizing short-term cash flow processes

Implementing, monitoring, and optimizing short-term cash flow forecasting can be simplified through digitalization and the use of digital tools. These tools contribute to predicting short-term cash movements, managing and analyzing incoming and outgoing cash flows, and setting up overdraft authorizations or credit lines to handle uncertainties. Additionally, these tools often integrate with other financial systems, creating a cohesive financial management environment.

Medium and long-term cash flow forecasting

Medium and long-term cash flow forecasting aims to support the company in strategic and significant decisions, planning investments and external growth opportunities, optimizing resource allocation, and anticipating risks. It helps determine the company’s risk hedging policy. This forecasting typically involves several steps, starting with data collection and flow consolidation. Analyzing consolidated forecasts then informs strategic decisions regarding investments and financing. Periodic revisions of forecasts adjust these investments and financing as conditions evolve. Comparing cash flow forecasts with actual results ensures forecast reliability.

Digitalizing medium and long-term cash flow processes

Today, medium and long-term cash flow forecasts are often still managed in Excel, exposing companies to errors and unreliable data. Data usually comes from heterogeneous sources (emails, SharePoint files, etc.) and may involve manual standardization and consolidation, which is time-consuming and error-prone. Using a fully integrated cash forecasting solution like myDiapason allows companies to digitize and optimize all steps of medium and long-term cash management while ensuring data quality and consistency.

MyDiapason Solution

The myDiapason treasury management solution enables the modeling of the budget structure in a single screen with various budget items and a frequency determined by the company’s needs (quarterly, monthly, weekly, etc.).

Each subsidiary can report its cash forecasts directly into the tool based on the company’s established process, then submit them for validation to the central office. Information consolidation is instant and can usually be done in different currencies at a predefined exchange rate, allowing budget counter-valuation. The treasurer can view the opening balance and all forecasts in one report, analyzed from various perspectives according to the treasurer’s desired organizational structure. This supports relevant decision-making for investments and financing to achieve the company’s financial objectives. Comparing actual results with forecasts and understanding discrepancies is facilitated, with the ability to reintegrate these discrepancies into future schedules, improving financial planning. Additionally, the budget simulation module enables the treasurer to explore various scenarios regarding expenses and revenues (e.g., revenue increase, financing rate changes, investment period shifts), providing visibility into potential impacts on long-term positions, enhancing budget management and financial planning.

By modeling a foreign currency cash flow forecast, a foreign exchange position can be constructed. This process is crucial for companies operating internationally or with operational companies or subsidiaries exposed to currency risk. The foreign exchange market, the second-largest financial market by volume, fluctuates based on economic, political, and geopolitical factors, exposing companies to currency risk. Managing this volatility effectively is a major challenge for treasurers and financial directors. Poor currency risk management can significantly impact company results, such as unfavorable exchange rate movements between contract conclusion and payment dates, jeopardizing transaction profitability.

Implementing a currency hedging policy

To limit exposure to currency risks and preserve cash flow, companies can implement hedging methods (spot, forward contracts, options, etc.). Effective currency risk management provides better visibility on margins and cash flows, facilitating strategic decisions (investments, opening a subsidiary, developing new offerings). Setting up a currency policy requires evaluating the company’s risk exposure (percentage of revenue invoiced in foreign currencies, proportion of expenses in foreign currencies, foreign currency investments and debts). Cash flow forecasts are essential for simulating various scenarios and exploring different hypotheses. This risk assessment helps define and implement a precise currency policy.

Digitalizing currency risk management processes

To anticipate, evaluate, manage, and monitor interest rate and currency risks, treasurers can rely on an integrated financial risk management solution within the company’s information system. This assists in identifying financial risks, implementing and centrally managing financial instruments, connecting to dealing systems and market data providers, and valuing and aggregating flows.

Today, AI and machine learning technologies further enhance treasury management and currency risk modeling processes. They can improve reconciliation, fraud detection, cash flow forecasting, currency position determination, and hedging ratio optimization. Better forecasting of currency risk exposure reduces under-hedging and associated risks and costs. Improved exposure forecasting also optimizes exposure timing, reducing potential swap costs due to uncorrelated hedges and exposures. AI algorithms can incorporate probabilistic methodologies to enhance currency hedging policies, optimizing hedging ratios and risk tolerance within a defined confidence interval.