Most organizations arrive at a crucial point in currency management when they start growing, often through spinoffs, mergers, acquisitions, and regional office setups.
When that happens, their ability to manage foreign exchange (FX) becomes more time-consuming. Large organizations often have an in-house treasury function that can manage regional bank accounts, trade currency, and facilitate bank relationships. But for those businesses in growth mode, an independent treasury function inside your business may not always be the most productive use of headcount and resources. Because of this, the process often falls at the feet of the controller, CFO, or someone in accounts payable.
Why is currency management so important? Businesses set up regional currency accounts to simplify payments when operating across different countries. Finance organizations use local currency accounts for a variety of payout situations, including payroll and commission payments; vendor, supplier, and service provider payments; expense reimbursements; funding of local subsidiary bank accounts; partner and reseller fees; local tax and regulatory payments; beneficiary payouts and licensing and royalty disbursements.
Currency management is a process that needs to happen very quickly. For example, shortfalls of cash management can require businesses to buy currency at a spot rate to meet payroll. But if the bank is 18 hours away, you then have to wait for them to open to actuate a transfer of funds. Now imagine if every month, you have to deal with FX conversions.
Missing a payment could cripple the regional business unit, particularly as the business is trying to gain traction and establish relationships. Some subsidiaries operate as cost-plus entities or use cost-plus accounting where they essentially don’t have their own revenue. For example, a local support office or service center may have expenses or need to pay its staff. Clearly, currency management processes affect the finance side of the operation but also the company’s ability to conduct business.
In February, we surveyed over 120 senior finance officials at midsize businesses to understand their approach to FX management in their organizations. Of those who managed more than two entities, two-thirds also had at least one cost-plus entity and 39% had at least three cost-plus entities.
Of those surveyed that had more than two entities (cost-plus or standard accounting), one major truth appeared. Only 10.8% stated that they have an independent, designated treasury function. Instead, 29.2% have someone in accounts payable manage the currency processes. Another 26.2% has someone else managing the process (presumably a member of the senior-level finance team such as the CFO or controller). And another 27.7% do not have any currency management, which indicates that they may not even bother with local currency issues. Interestingly enough of that last group, 25% of those businesses also had at least one cost-plus entity, meaning some form of conversion has to happen within the stream.
As expected, whoever is responsible for the treasury function has to work with local regional banks. This is not as easy as it sounds. Some of the biggest challenges to currency management are around communicating with banks and administering those bank accounts. There can be language difficulties, time zone challenges, and regulatory issues.
In our survey, 31.5% stated that bank account administration posed the most difficult challenge. Similarly, another 31.5% indicated that communication and relationship management with the bank was the most challenging aspect. 17.8% indicated that bank fees posed a challenge. So, a fairly large majority feel that it’s the effort around working with the banks themselves that presents the biggest hurdle.
Here’s a typical strategy that many midsize B2B companies employ for currency management. Assuming the company has its head offices in the U.S., they may have individual currency accounts for each of their global entities and subsidiaries: the U.K. (GBP), Germany (Euro), Canada ($CAN), Australia ($AUS), and Japan (Yen). If the offices in Japan and Australia were cost-plus entities (non-revenue generating), then headquarters would need to fund operations in those locations. As a result, they’re converting USD to Yen and Australian dollars. Because of cash flow issues, conversions may happen twice a month, taking the controller’s time away to work with the local banks.
As you can surmise, payables automation technologies that support multiple entities and multiple currencies could be an answer to some of the business’s FX challenges. Because it happens at the point of funding payment accounts, and activities are closely tied to all vendor payments, it may work for a variety of situations where the business doesn’t have a treasurer.
