
Introduction to Trade and Working Capital
Exporting for many businesses is first and foremost a way of achieving growth. International trade also means diversifying a business’s customer base.
01 February 2018
Most corporate treasuries have done a good job of eliminating the margins on high-value cross-currency payments through the use of ECNs, FX platforms and shopping around key FX players. They tend to have a minimum threshold, say £100k, above which cross-currency payments are considered a “trade” and are booked via the central treasury team. However, cross-currency payments below that threshold, usually low-value but high volume, often fall into the “black hole” in terms of price transparency – the ‘invisible FX’.
These payments are typically handled in a Shared Service Centre or financial operations teams such as AP (accounts payable) or AR (accounts receivable) teams which are frequently located in distant offshore locations and are often not visible to the corporate treasury.
Frequently treasury managers in large firms admit to being in the dark in terms of the total value of such items, how they are being processed or what sort of FX pricing mechanism is being applied. Yet, these lower-value items can add up into hundreds of millions, or even billions, of pounds in aggregate value, and therefore even a small improvement in margin can yield significant material savings.
The solution on these payments is to automate the entire process so that a £5 payment also gets the benefit of a live rate and a pre-agreed margin from their relationship bank. The ‘invisible FX’ opportunity is most glaring in the payables side but the cost saving potential is equally large on receivables side. Each time a foreign currency receipt hits a bank account, the bank would usually apply a ‘rack rate’ for the FX which could typically be as large as 2%-3%.
The business case for a solution
The potential business case for developing a solution for the invisible FX within an organisation is compelling and should be a priority. Cost savings could be significant and driven by:
These low-value cross-currency transactions tend to be high-volume in nature so automation is key to success. It is difficult, and expensive, to have an in-house FX dealer to manually handle these transactions. Thankfully, banks have developed solutions which are typically part of their cash management channels. Broadly speaking, there are 2 category of banking solutions:
Corporate clients planning to realise these cost savings from their invisible FX flows should treat this as a strategic global treasury project. The first step is to identify the volumes and value of these payment and receipt transactions across all subsidiaries. A careful examination of bank statements for a quarter should be sufficient to identify these flows.
The next step is to understand what FX margin is currently being paid on these transactions, which will then help develop the business case for centralising this FX flow with a single, or few, relationship banks. A discussion with the bank or banks should follow to understand their solutions and the pricing offered.
Finally the invisible FX flow embedded in the Account Payable and Account Receivables process should be channelled through the new arrangement to ensure that the low-value cross-currency transactions get the full benefits of live FX rates and pre-agreed margin.
Full automation of these transactions will ensure fewer errors, and automated reconciliation within the ERP/TMS platforms, leading to significant productivity gains.
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Exporting for many businesses is first and foremost a way of achieving growth. International trade also means diversifying a business’s customer base.