Foreign Exchange Risk Management – The Importance of External Treasury Management Solutions to SMEs

FinanceTrading / Investing

  • Author Malcolm Debris
  • Published March 29, 2011
  • Word count 581

Treasury management is the process of managing financial risks that may be associated with trading or management of a company's holdings. This includes foreign exchange risks that can be a result of ever fluctuating forex markets. Treasury management in regards to forex is extremely vital for ensuring protection against fluctuating exchange rates especially when dealing with imports and exports of goods and services. SMEs (small to medium sized enterprises) often cite the dangers of entering a volatile exchange markets as reasons for not engaging in foreign trade. So how can treasury management services that focus on currency risk management help SMEs?

As previously mentioned the currency markets are by their very nature in a state of flux. Fluctuating exchange rates make management of payments, incomes, budgeting and forecasting extremely difficult to maintain, processes essentially for the running of the financials of any business that deals with foreign partners and clients. Whilst it is not unusual for large corporations to have currency management departments within their financial teams, SMEs (small to medium sized enterprises) find the management process of financial factors difficult with an already stretched financial team. Multiple payments that result from various processes within the business cycle can contribute to inefficient financial processes.

External foreign exchange risk management services give SMEs the ability to utilise the experience of foreign exchange experts to fully take advantage of fluctuations within the forex markets to ultimately bring SMEs better value from their financial processes.

Foreign Exchange Treasury Management services not only manage the risk element of financial processes but also help SMEs develop strategies to utilise the markets to bring better returns.

So what does a forex expert actually bring to the table in regards to management of your financial processes? Foreign exchange brokers provide ongoing information on exchange rates and undertake reviews of the SME's current foreign currency and payment processes. Once they have analysed these processes they can provide recommendations on how to improve these functions. Foreign exchange dealers provide guidance on all aspects of cash management, from banking structures, cash pooling and cash concentration techniques.

Ultimately it depends on the priorities of the business. If the business deals with a variety of currencies then they will need to consider how their own FX policy is structured. A forex dealer who specialises in treasury management can develop a sound FX policy and develop an appropriate strategy to deal with multi payment schedules, budgeting and costing.

The benefit of using a specialist when it comes to foreign exchange is the knowledge of the markets. Forex treasury management services utilise the skills of foreign exchange experts to ensure the client receives competitive commercial rates of exchange in both spot and forward markets by optimising the timing of currency purchases. They do this by closely following the currency markets, keeping on top of the economic and political environments to interpret foreign exchange market movement.

SMEs are reluctant to engage with an export strategy due to the perceived dangers of an ever changing forex market. Research carried out by Corporate FX have found that over 50% of SMEs believe fluctuating markets effect their decisions to trade overseas. Management of this risk is integral to optimise profits yet only 44% of SMEs that export engage with active forex risk management. The education of SMEs is of paramount importance in encouraging SMEs to trade overseas and one way of education is to utilise the skills of external treasury management services to streamline financial processes that rely on currency trading.

Corporate FX is a privately owned company.We are a market leader in supplying commercial forex trading services and hedging strategies including trading Spot Forex and have developed a highly personal treasury management service.

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