Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727. Her Majesty's Revenue & Customs MSB registration No. 12197454. © 2013 Halo Financial Ltd. Registered in England No. 5155787. 11 Ivory House, Plantation Wharf, London, SW11 3TN, UK

David Johnson, Director

HALO FINANCIAL

INTERNATIONAL MONEY TRANSFERS

& FOREIGN EXCHANGE SPECIALISTS

‘Win some, win some more’ – Currency Management Simplified!

Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727. Her Majesty's Revenue & Customs MSB registration No. 12197454.

© 2013 Halo Financial Ltd. Registered in England No. 5155787. 11 Ivory House, Plantation Wharf, London, SW11 3TN, UK

6 ways to change your currency management from ‘Win some, lose some’ into ‘Win some, win some more’.

Whether you are entirely risk averse or an out and out gambler, the way you manage your company’s currency requirements will have a direct impact on your business’s profitability, competitiveness and perhaps even its viability. Here are 6 steps to ensure you know the risks and take appropriate steps to manage them.

Step 1 - Plan ahead

The sooner you know what your currency exposure is, the sooner you can implement plans to manage the risk of adverse movements or even enhance your profits through appropriate hedging strategies. And by appropriate, I mean a plan which works for your company’s circumstances, the industry sector you are in, your attitude to risk, how certain your forecasts are and many other factors. Often, a suggestion of planning ahead is treated like incitement to gamble with company funds but with a properly implemented plan, nothing could be further from the truth. A Financial professional who mitigates every penny of currency risk cannot be accused of gambling. He or she is simply ensuring the hard won gross profit generated by the sales team isn’t diminished through exchange rate fluctuations. The Sales Director will not be best pleased if he has had to agree a very tight pricing model in order to win the business only to see a 3% fluctuation in the currency rate wipe his profit off the face of the balance sheet. If you are not sure of exact forecast figures, it doesn’t mean you can’t manage the bulk of your currency risk. A small top up transaction when the specific numbers are known won’t alter the overall average exchange rate too much. If you start to plan early, you may be in a position to take advantage of an exchange rate before it declines or protect against that decline in other ways. You may be able to offset some of your currency receipts against expenditure; removing the currency risk. Or you may be able to negotiate payments or receipts in your home currency, passing the currency management off to your trading partners – as long as you don’t suffer as a result. Ultimately, although you are planning well in advance, there are times and circumstances when the best plan is to do nothing for now and wait before taking advantage of an improving exchange rate.

Step 2 – Get the right information

So you are taking ‘Step 1’ seriously, planning your requirements and assessing your needs but, without the right information or guidance, upon what will you base your decision? Without relevant, accurate information and perhaps without a little experience and expertise, you will have to wade through masses of facts and opinions to reach a decision on an appropriate course of action. If you have in-house treasury and currency expertise, then use it to your best advantage. If not, and very few companies have that kind of in-house resource; seek the help of a specialist. There are companies which charge for bespoke currency information, saving you the hassle of analysis all the data yourself. There are also specialist foreign exchange brokers who offer guidance on market trends and ought to be able to tailor that information to your specific needs. Be discerning here; a broker who tells you to ‘trade now’ every time you speak with him is simply chasing commission today without keeping your best interests at heart. Choose an Authorised Payment

Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727. Her Majesty's Revenue & Customs MSB registration No. 12197454.

© 2013 Halo Financial Ltd. Registered in England No. 5155787. 11 Ivory House, Plantation Wharf, London, SW11 3TN, UK

Institution sanctioned by the FCA (formerly the FSA) and check them on the Payment Services Business register on the FCA website. www.fca.org.uk Ask for the opinion of the trader and analyse what you are told. Question their views and check that they will provide as many services as you need for your business. (there are examples of these services below). If you choose to trade with that company, keep a record of their view and check back from time to time to see if they are on the ball.

Step 3 – Timing

No one can control the currency markets. Something like $4 trillion a day passes through the world’s forex trading desks so the movements are as untamed as those of the ocean. And just like a surfer waiting for a wave, your only option is to start paddling at the right time. Timing is everything in good currency management.

As the company’s Financial Officer, you may not be tasked with enhancing the bottom line profit but, if that comes as a by-product of effective management, no one will complain; least of all the shareholders; of which you may be one. The error that many make is to assume that if you haven’t traded at the very pinnacle of the market spike, you have not succeeded and that just isn’t a reasonable task to set yourself. Trading near the top of a range is a sensible target and ensuring you do not trade at the bottom is the bare minimum requirement. You will not always achieve the former but there are ways and means to ensure you do not suffer the latter.

Step 4 – It doesn’t have to be all or nothing

All too often we work with companies who see their currency management as a stark black and white image. Either they cover everything on the day of invoice, the day the invoice is paid, at the start of the season or entirely ad hoc. From my experience, the most effective currency management is a combination of some early cover, some opportunism and some risk management. You may feel your currency turnover doesn’t warrant that kind of complication and, you may well be right but for most businesses; especially companies which rank amongst the ‘M’ of the SME market, there is a lot to be said for having a more flexible approach. Those who saw the Pound slumping in the first few days of 2013 and had the flexibility to buy a little ahead of themselves were probably be feeling pretty smug and undoubtedly had the wriggle room to be more competitive while the Pound languished around USD 1.48 and EUR 1.14. The gain they locked in from the USD 1.64 and EUR 1.23 levels afforded them between 7% and 10% of savings / pricing flexibility / competitive edge when compared with the exchange rates available 60 days later. Those on a 60 day invoice period and who didn’t cover themselves against risk would have been exceptionally frustrated by the moves.

Step 5 – The right tools for the job

So, the exchange rate has moved in your favour and you want to take advantage of the move but you don’t actually need to exchange your funds for another 90 days. You are perfectly right to wonder, why trade now and perhaps, how do you trade now? The ‘Why’ is answered in this way; it might be that by securing the exchange rate, as those who traded in January did, locks in an enhanced profit, perhaps it simply secures the projected sales profit and it will certainly cut the risk of exchange rate decline.

Buy or sell at the right moment and you will avoid risk and enhance profits.

Authorised by the Financial Conduct Authority under the Payment Services Regulations 2009, FRN: 528727. Her Majesty's Revenue & Customs MSB registration No. 12197454.

© 2013 Halo Financial Ltd. Registered in England No. 5155787. 11 Ivory House, Plantation Wharf, London, SW11 3TN, UK

The ‘How’ offers a vast array of possibilities and the right choice for your company is best examined by a specialist in consultation with your financial team. Spot contracts are the most widely used contracts in the foreign exchange market. It is an agreement to purchase one currency and sell another at a fixed exchange rate and to settle the balances usually within two working days. There is some flexibility available here. The settlement can happen the same day the contract is agreed or normally up to 5 working days from the booking of the ‘trade’. If you want to agree the exchange rate but are not yet ready to settle up, you may opt for a ‘Forward Contract’. That works just like a ‘Spot’ trade but the settlement and exchange of funds is delayed until an agreed date in the future. Most brokers will limit this forward period to one or sometimes two years. The beauty of a ‘Forward Contract’ is that you know your exchange rate well in advance of the settlement so you can budget, cost goods for sales staff, print sales brochures with set and guaranteed prices etc etc. If the market rate is above your cost level or you have to send a sales brochure to print or have agreed a long term contract, there are ways to guarantee you receive that costed level as a bare minimum. Most banks will suggest ‘Option’ products to guarantee a worst case exchange rate. For some businesses these are just the right product to use. They either involve the payment of a Premium to purchase the right to buy currency at a minimum level. Or they have a combination of clauses which offset the bank’s risk through a penalty clause. The variety and permutations of options available is as vast as your imagination. In my opinion, for the majority of companies, Options are either unnecessarily complicated or expensive. A similar, although not quite so flexible, alternative is the use of automated market orders to guarantee a worst case exchange rate and perhaps even to target a best case rate within the forecast exchange rate range. These orders are termed ‘Take Profit’ or Limit orders at the top end of the range and ‘Stop loss’ orders at the bottom end. Used wisely, a combination of the two can be placed to take advantage of any advantageous spikes and to mitigate loss if the market moves against you.

Step 6 – See currency as an opportunity and not a hassle

Yes the fact that you have to convert one currency into another is a hassle. There are no two ways about it but, on the basis that Sterling isn’t about to disappear into the Euro, that even the Euro might not exist in a few years’ time, and the fact that business is becoming increasingly global, rather than fretting about the hassle, embrace the opportunity that currency conversion presents to enhance profits. When managed properly, risk can be eliminated, opportunities can be captured and costed prices can be improved upon. With margins being squeezed, who knows, the finance department could be the company’s biggest profit centre. For Further Information If you have any questions, then please get in touch with Halo Financial. You can contact our foreign exchange specialists on +44 (0)20 7350 5470 or drop us an email via help@halofinancial.com

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