No matter what stage of your entrepreneurial journey you are, managing or minimizing currency risk is always crucial to shield the profitability of your organization from the multifaceted impacts of foreign exchange (FX) currency fluctuations. Reason can range from geopolitical tussles, ongoing inflation, rising commodity prices and beyond.
Still, the grave damage that FX fluctuations do to the worldwide economy manifests in unprecedented situations for businesses operating across the globe. As businesses function in the interconnected realm, FX risks stemming from many factors that can cause an overall economic disruption while unveiling the fragility of global supply chains.
Situations like these cause businesses to struggle to cope with the enormous pressure created by soaring demand, skyrocketing prices and currency volatility. Thus, a multi currency bank account in this scenario is paramount in mitigating FX risks. Business stability can be achieved with the strategic utilization of these bank accounts. In relevance to the current scenario, we can assess that businesses face unprecedented pressure from recent economic disruptions, whether from the worldwide pandemic or the ongoing Russia-Ukraine war. What follows is a rundown of some effective solutions to mitigate fluctuating FX risks:
Multiple sourcing to diversify the supply base:
- Global interconnectedness in the business landscape is a boon. Still, during uncertain times, it depicts the vulnerability of supply chains, causing economic volatility.
- While limited buffers of supplies are good for effective cash flow, timely control and management of risks becomes mandatory to align with currency fluctuations. If businesses rely on a supply chain network of limited geographical regions, events of significant currency swings may cause substantial losses.
- If the supplier demands payment limited to their local currency, your business gets exposed to such local currency rallies.
- The solution to this problem lies in creating a broad base of supply chains so that sourcing products from multiple locations increases flexibility and defensibility.
- Even if multiple sourcing is not feasible for a particular business model, having a backup for the supply chain should always be available.
- A few effective currency hedging strategies involve using financial instruments like forward contracts and target rate orders to mitigate risks revolving around FX currency fluctuations.
- Businesses indulging in global purchasing, irrespective of size, can use these hedging strategies by contractually purchasing by forecasting their expenditure and cash flows. Although they are not 100% risk-free solutions, implementing them ensures that you can detect risk in time and calculate in advance what a foreign currency payment would cost you.
- Currency hedging is something that businesses are extensively practicing via tech support from different platforms that provide reliable access to more of such specialist currency instruments.
Risk identification & open communication:
- The impact of currency fluctuations is acutely felt throughout the supply chain network, as any business doesn’t operate in a vacuum.
- Therefore, officials in the business organization must be vocal about how they expect the currency to navigate in future, and it also helps them understand the type of currency exposure so that they can prepare the financial roadmap to cope with the currency fluctuations.
- Hence, we can conclude that having a collaborative relationship with the suppliers paves the way for a robust supply chain and enviable solutions during volatile times.
Leveraging cross-border payments:
- Earlier finance professionals and treasury managers had to focus on creating strategies to predict and minimize risks in the FX currency fluctuations. Still, the emergence of off-the-shelf payment tools has changed the narrative.
- Such payment options by different payment providers offer cross-border payments and currency conversion on the go without compromising on accuracy, convenience and flexibility.
- With the conventional mode of payment, by the time the invoice would be generated, currency fluctuations would further increase the cost from what was decided at the point of purchase.
- Cross-border payments allow instant transactions, eliminating the FX risks associated with currency, thereby saving time and money.
Business organizations tend to manage the most visible risks associated with larger transactions by hedging against them with financial instruments, such as currency futures, swaps or options. They mostly ignore the risk related to the mismatch between the cost and investments in one currency and the revenue generated in another. Therefore, formulating effective and comprehensive currency risk management strategies is paramount to better measure and manage the risks.