Why you Require a New Currency Management Strategy for your FX Rates Budget

Why you Require a New Currency Management Strategy for your FX Rates Budget
Last Updated: 29 Jan 2021

When it comes to your small business, you have enough challenges to deal with, especially during these uncertain times, without having to consider and worry about your foreign currency transactions to protect cash flow. Unfortunately, the importance of fluctuating FX rates is something a small business cannot ignore if they wish to stay afloat, adding a new level of required risk management strategies that businesses must consider.

When FX rates fluctuate, even just by a few points, you could be at risk of losing thousands of dollars from your business's cash flow. This can hinder expansion plans or even put your business on the edge of failure altogether. Poor cash management strategies lead to shrinking profit margins.

To protect, and even grow, your business over these turbulent times in the market, you need to have a customized foreign exchange risk management in place to protect your business from this type of exposure.

1. Understanding your Business Exposure to Currency Volatility

If you purchase, invoice, work with vendors, or run a business that incorporates overseas payroll using foreign currency, your business is exposed to risk and profit loss. Your operating budget and plans for business growth depend on acting on the known projections from solid budgeting practices. 

Financial planning and expertise are crucial when it comes to managing the risks in currency volatility. You can estimate the income your foreign invoices will generate over the upcoming 6-12 months, for example, but you also need to assess the risk of your cash flow against currency exchange rates and be able to fully understand how that income could be impacted so you can plan and budget more efficiently.

2. What is your Risk Management Strategy?

Once you understand your business exposure to currency volatility and understand your overseas clients’ currency costs when it comes to your invoicing, you can make an informed decision on your risk management strategy. You need to begin with understanding what your goals are in managing your currency risk.

Ask yourself: 
    a.  What is your target or ideal FX rate that will keep your business within acceptable budget projections supporting your profit margins? 
    b.  How can currency hedging help manage business risk?

When it comes to the latter, two of the best tools for managing currency risk are Forward Contracts and Market Orders. Forward Contracts lock in the current exchange rate for a period of up to one year and Market Orders automatically detect an exchange rate move in your business favor so you can choose a limit order which targets an exchange rate higher than the current market rate, or choose a stop-loss order, which will protect your business against market volatility by targeting a worst-case exchange rate and triggering a trade when that rate becomes effective.

3. Why you Should Work with a Third-Party Platform Provider for your Business Risk Management Strategies

When it comes to risk management for your business, you may not always know or understand what the best execution tactics are – or even which ones are available due to constantly changing technologies and market landscapes. A foreign exchange solution provider has a team of market experts that can help with strategies, and best practices, and can provide the expertise required to fill in gaps that may exist when working with a traditional bank or financial institution. 
When it comes to MTFX, we have over 25 years of experience working with SMBs to ensure that they have a personalized and effective risk management strategy in place to protect themselves from market volatility. Working with over 100 currencies around the globe, our team of market experts can offer customized hedging tools and expert commentary on currency trading in the global market to ensure your cash flow is protected to support business growth.

4. Execute and Rest Assured

We understand that fluctuation in market rates will always operate independently of your core business fundamentals. Due to this fact, your strategies and procedures for currency risk management must operate in parallel with budget evaluation and financial targets.

Ensuring this consistency can include tactics such as judging whether hedging is working best or perhaps cash should be freed up for speculative trading – or even a combination of the two. Adapting to a new way of managing risk requires a willingness to make course corrections that keeps currency risk management in line with business planning so you can support future growth. 

The key is to manage risk, is not to create it. 
The foreign exchange market deals in trillions of dollars, and the transactions are at the speed of light. As an SMB, you do not have to accept currency fluctuation as a cost of doing business. With proactive planning, specialized advice, and the proper tools in place, you can effectively manage the ebbs and flows of currency volatility while still attaining business targets and focusing on growing your business around the globe.

At MTFX, our platform can help your business rebound from the impacts of COVID-19.

Learn more about how a third-party payment platform can help you retain your local customers and expand your international business. Contact one of our market experts at MTFX and we will show you how foreign exchange currency risk management can protect your business while increasing profits.

Open an account with MTFX today and see how our currency management strategy helps you to minimize currency risk.

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