Photo of Serina Hourican, Bank of America Merrill Lynch, Gerald Kern, Flex and James Lee, Citi.
Flex’s treasury manages an extensive balance sheet and cash flow hedging programme. Here’s how it went from fragmented manual processing to automated end-to-end processing.
Senior Director, Treasury
Flex is a global supply chain solutions company that has manufacturing operations in over 30 countries, over US$24bn in annual revenues and 200,000+ employees.
in partnership with
Delivering optionality and automation into a complex balance sheet and cash flow hedging programme
With its global operations, Flex has to handle a significant foreign currency exposure spread across 40 currency pairs. With the expanse of its global business operations at any given time, Flex’s balance sheet and annual cash flow exposures extend to billions of USD. Flex manages an extensive balance sheet and cash flow hedging programme to protect the earnings against FX volatility.
Historically, Flex’s corporate hedging policy on cash flow exposure was passive – treasury had the mandate to hedge a fixed percentage of cash flow exposure for the coming six months using FX forwards. This strategy, although easy to administer, was not the most effective in avoiding hedge losses.
Traditionally, Flex gathered month-end balance sheet exposure data from business units spread worldwide (over 200 reports) in Excel spreadsheets. Often, the reported exposure would not tie to the ERP because of accounting errors related to booking of FX transactions. Treasury would, over the course of a week, consolidate these Excel files manually before trading decisions could be made.
The process of balance sheet hedging was very manual, time consuming and prone to errors at various stages of data reporting and hedge execution. Flex treasury wanted to make the cash flow hedging programme more tactical and dynamic.
The key changes are the use of options-based structures such as zero cost collars, forward extras and participating forwards, and the enablement end-to-end automation of balance sheet exposure reporting, consolidation and trading activities. This has been achieved through a combination of internal IT development and a customised FiREapps implementation.
In practice, balance sheet exposure data is extracted directly from individual subsidiary level ERP instances and sent to FiREapps. The clean-up and standardisation of FX accounting across subsidiaries was a major objective that needed to be achieved to make the subsidiary level ERP data actionable. Treasury initiated a global project to clean up FX bookings. Working with internal IT, tools were developed to structurally eliminate certain types of incorrect FX bookings on an ongoing basis. Additionally, extensive FX trainings have been set up for the accounting/GL teams to ensure a minimum level of education is required for handling FX transactions.
Currently, FX data is extracted directly from a subsidiary level ERP instance and sent to FiREapps. In the current implementation state, end-to-end exposure management and trading activities are seamlessly captured in FiREapps.
Best practice and innovation
Flex treasury devised a systematic approach to evaluate different hedging strategies from the mix of forwards and zero cost option structures and select the most suited instrument given the underlying market conditions.
It then made fundamental changes to its FX hedging policy to hedge forecasted cash flows, mainly by using a mix of options-based strategies to achieve significant benefits. These changes were implemented globally and included the use of option structures onshore in China and Malaysia.
The use of options structurally has delivered the desired level of optionality into Flex’s hedging programme, minimising hedging losses under certain scenarios.
Relating to the automation of balance sheet hedging and the FX system implementation, having previously standardised FX accounting across its subsidiaries worldwide, Flex has now eliminated the manual reporting of exposure data and the use of Excel as an exposure management tool.
- Achieved operational excellence by automation of an end-to-end balance sheet hedging programme using a dedicated FX system.
- Standardised accounting of FX transactions worldwide.
- Centralised and automated gathering of balance sheet exposure data directly from ERP and sending it to the new FX system.
- Reduced the need for possibilities of manual reporting and trading errors while enabling systematic tracking of global hedge coverage.
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