Ignoring currency volatility might appear to be a viable strategy for reducing complexity rather than a potentially costly bet that could significantly impact profitability and accountability towards shareholders. It can be an especially tempting option when FX markets are relatively benign, as was the case towards the end of last year when currency markets calmed down considerably.
Kyriba’s currency impact report from Q4 2023 notes that the negative impact of currency movements on North American and European corporates in the final three months of last year was almost 60% lower than in the previous quarter.
But while there was understandable relief and optimism among global organisations at the downward trajectory of currency impact, Andy Gage, the firm’s Senior Vice President of FX Solutions and Advisory Services warned US corporations in particular could expect more headwinds in 2024.
The impact of this increased volatility will be exacerbated by the disconnect between central treasury, subsidiaries and other business units due to misaligned incentives and lack of relationships explains Jackie Bowie, Managing Partner and Head of EMEA at Chatham Financial.
“In one client company we saw that poor forecasting by subsidiaries was causing P&L impact for treasury, but not the subsidiary,” she says. “When they changed how subsidiaries were measured such that they felt the impact of the missed forecast in their financials, they quickly become better at forecasting and providing more timely updates because the incentives were aligned.”
Additionally, when central treasury and subsidiaries do not have a strong relationship, it creates a vendor mentality that results in comments such as ‘treasury never explains why we do this’, ‘we have always done it this way’, or ‘we aren’t just order takers’. This can be exacerbated by cultural differences, time zones and language barriers.
“When people have met their counterparts in other parts of the organisation and feel a connection to them, they are more likely to provide the necessary information correctly and in a timely fashion,” suggests Bowie.
Any disconnect between central treasury and subsidiaries impacts the former’s ability to identify, quantify and manage risks appropriately. When a subsidiary fails to report a new forecast or exposure in a timely manner, central treasury is unable to execute a hedge to manage the risk – and in many cases the impact isn’t discovered until the next reporting period.
“Another example is procurement or sales agreeing to contracts that bring FX risk into the picture without discussing the impacts with the central treasury team,” says Chatham Financial Managing Partner & Chairman, Global Head of Corporates Amol Dhargalkar. “Operational challenges can also arise when subsidiaries are executing their own spot trades too late to match fixings or not taking into consideration the broader cash needs of the organisation.”
Where companies are further hampered by inadequate performance measurement and reporting mechanisms, they need to create accountability metrics that are aligned across the organisation and make each team aware of what the other is doing.
Another key challenge for CFOs and treasurers is resistance to change and inconsistent follow-through due to inadequate communication, documentation and programme maintenance.
Many of the reasons for this have been discussed above, but Dhargalkar observes there are a number of additional causes.
“First, not many organisations incentivise and reward breaking down barriers between teams or business units, so people won’t strive to do it,” he says. “Cultural differences can play a role too, with different norms about working relationships making it difficult to get things done. Additionally, companies that grow quickly through acquisition often end up with business units that are not well integrated and feel like outsiders to the organisation – or the sheer number of systems that exist can be a barrier.”
