A Currency Roundtable to Weather FX Headwinds

30th May 2018

Recently, Jon Vincent, Tennant Company’s Senior Treasury Analyst, spoke at an industry conference describing how Tennant, a multinational corporation with manufacturing operations in the US, Brazil, The Netherlands, Italy and China, reduced its foreign exchange (FX) exposures by $25m. According to Vincent, a key part of their success was Tennant’s decision to create an internal Foreign Currency Risk Management Committee to help develop an effective currency risk-management roadmap, in turn ensuring a robust FX programme.

Hearing about Tennant’s success with this approach came as no surprise to me – after more than 14 years of advising corporations on currency risk management strategies, I have seen first-hand the effectiveness in building a currency committee – or roundtable – to provide insight into currency exposures, lessen FX impacts on earnings, while strengthening inter-department relationships between stakeholders.

In the case of Tennant, stakeholders from various departments were called upon to form the committee, with members from tax, accounting, legal, financial planning analysis (FPA) and treasury. Collectively, Tennant’s currency committee is in charge of providing oversight and support of their automated FX programme and continue to assess programme needs quarterly.

Seeing their success, the question of what an effective currency roundtable looks like arises. Although every company has unique needs, currency roundtables should include representation from the following groups to deliver maximum results:

Executive management

The CEO and CFO focus on business strategy and performance. They embody what the level of risk tolerance currently is, and what it will be on a go-forward basis, based on their understanding of future plans for operations. An executive perspective is grounded in financial metrics. Because the buck stops with them in terms of currency impact, both executives should have a seat at the currency roundtable.

Accounting 

The corporate controller serves as the custodian of the company’s accounting data and is responsible for disseminating that data throughout the organisation. Including an accounting representative ensures multi-currency accounting accuracy, compliance and control issues are considered. When currency volatility impacts the organisation, the controller must decipher the cause and the roundtable is the right place to discuss FX impacts proactively and identify solutions.

Regional finance teams  

Generally, local finance teams are responsible for entity performance – individuals from these teams bring a ‘boots on the ground’ viewpoint to the roundtable, offering localised insights that inform currency forecasts. Additionally, currency swings can affect the compensation of the local business leaders, giving them a stake in the outcome.

FP&A 

It is the responsibility of financial planning and analysis to explain what has happened (impact analysis) and what could happen (scenario analysis). They are an asset to the roundtable, answering inevitable questions such as, “To what degree did currency impact the company in the last month/quarter?”, “How much impact can be attributed to volume vs rate?” and “Did currency issues move actual reported results away from budget and forecasts?”

Supply chain & operations 

Professionals in these areas are often responsible for pricing, supplier contracts, production costs—and, ultimately, the profitability of each product line. The individual representing this team should focus on issues such as determining the proportion of the company’s margin variance resulting from changes in the cost of materials and any impacts driven by FX volatility.

Tax 

Tax must manage an organisation’s tax liability and is focused on optimising tax strategy and impacts on the business. Decisions concerning intercompany transactions can lower a corporate tax rate, but can also introduce unintended FX exposures. Tax professionals will ask important questions such as, “Are there other strategies we can apply to manage this risk efficiently?” and “What are the tax consequences of reducing currency exposures?”

At the end of the day, it is the treasurer with the most at stake in managing FX exposures and in many organisations, FX falls on their shoulders. Treasury is responsible for having an accurate, complete and timely view of currency exposures and for managing the associated risk. 

Treasury responsibilities include seeking organic exposure reduction (e.g., netting) and finding natural hedging opportunities. As head of a cross-functional currency roundtable, the treasurer has visibility into business decisions that create currency exposures, such as when an executive is considering doing business in a currency other than the entity’s functional currency or the company’s reporting currency. In order to meet those responsibilities and run an effective roundtable, the treasury team needs visibility into currency trends and exposure-defining analytics. This detailed information and access to data will allow the committee to grow at the same rate as the business, as there are changes in size and complexity.   

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