Step 1: Estimate your costs or sales in foreign currencies

As difficult as it may seem, every company must estimate its expected fixed and variable costs for the coming year. Most companies can forecast their revenues based on experience or existing orders.

However, start-ups or young companies should also be able to at least estimate their costs thoroughly including rents, insurance, wages and production costs. Special attention should be paid to costs or revenues that are spent or received in a foreign currency.

Step 2: Profit or cost assurance – define the strategy

As soon as an approximate plan for the coming year is in place, the company should consider the importance of currency management. Regular earnings or expenditures in foreign currencies are obviously exposed to movements in exchange rates. If costs in a foreign currency are to be forecasted until the end of the year, the company needs to minimise volatility. This means that the exchange rate should be fixed so that there are no unexpected negative consequences at the end of the year.

Another option would be to protect the operating profit. Fluctuating exchange rates can rapidly ruin intended profit margins. In this case the company could aim to define the forecasted sales in the foreign currency and fix the margin based on this.

Step 3: Fix your budget rates

The budget is set, the currency management goals are defined, the major part is done. Now it is a matter of defining the budgeted rates for the various currencies based on the current exchange rate. A buffer of about 5% can be quite useful when doing this, i.e. instead of fixing the exchange rate from US dollar to Swiss franc at the current 91 cent, a rate of 95 cent could be budgeted. In this way, the minimum budget rate is defined and any negative exchange rate movement can be at least partially compensated for.

Step 4: Define the hedging strategy

With the targets and the budget course set, the next questions are: What currency developments can be expected? What is the industry outlook? Is the order situation relatively secure? Or is there practically no empirical data?

In the fourth step all these questions are answered with your personal relationship manager who is an expert on FX markets. Ebury then defines an individual hedging strategy in close consultation with the client.

Step 5: Ensure a flexible fit

It’s done: the measures have been defined, now it’s time for implementation. While Ebury implements the steps discussed and continuously monitors them, the company focuses on its core business. In contrast to traditional financial services providers such as banks, Ebury constantly monitors international trade and political events in order to assist clients with strategy adjustments. The Ebury team is supported by state-of-the-art technology and international currency analysts. It makes no difference whether the changes are driven by the currency market or whether the company’s order situation itself is changing. This allows the SME to focus on its operational business, which is worth a lot in uncertain times like these.

📩 Contact us to discuss your business’s needs and how Ebury can help you.

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