Budgeting with foreign currencies: This is how it works

Fall is the budget season for businesses. Upcoming project costs, sales and fixed costs must be defined or forecast. Budgeting should be as realistic as possible right from the start so that there are no nasty surprises at the end of the year and company goals always remain in sight. Traditionally, young companies in particular find it difficult to estimate future costs and revenues. But the impact of the COVID pandemic makes it difficult for even long-time entrepreneurs to forecast their revenues. But especially for companies that work with foreign currencies and have to convert their sales in each case, early planning and hedging is urgently needed - also because the coronavirus will keep international trade in its grip for some time to come.

Autumn: It's time for budgeting

Zurich-based fintech company Ebury offers flexible financial services in the areas of financing, currency and payment services to SMEs operating internationally. In doing so, the company makes use of state-of-the-art technology. In addition, Ebury specializes in protecting companies from currency fluctuations and provides the following tips to help internationally active SMEs take the right measures for the coming financial year. Foreign currencies play a special role here.

Step 1: Estimate your costs or sales in foreign currencies

As difficult as it may seem, every company needs to estimate its expected fixed costs as well as variable costs for the coming year. Existing companies can forecast their revenues based on experience or existing orders. But even start-ups or younger companies should at least estimate their cost side with some degree of reliability: These include rents, insurance, wages and production costs. Here, special attention should be paid to costs or revenues that are spent or received in a foreign currency.

Step 2: Profit or cost protection - define the strategy

Once a rough idea of the coming year exists, the business should consider what is most important to it in terms of foreign currency management. Regular revenues or expenses in foreign currencies are naturally exposed to exchange rate risks. Now, if costs in a foreign currency are to be forecast through the end of the year, the operation should choose to minimize fluctuation: That is, the exchange rate should be fixed so that no unpleasant surprises await at the end of the year. Another option would be to protect operating profit: fluctuating exchange rates can eat up defined profit margins very quickly - in this case, the company could aim to define forecast sales in the foreign currency and fix the margin level based on this.

Step 3: Fix your budget rates

The budgeting is in place, and the currency management targets have been defined: The major part is done! Now it's time to define the budget rates for the various currencies based on the current rate. When defining, a buffer of about 5% can be quite useful, i.e.: Instead of fixing the exchange rate of US dollars to Swiss francs at the current 91 centimes, an exchange rate of 95 centimes can be budgeted. In this way, a pain threshold is set for the conversion and a negative exchange rate movement can be partially absorbed.

Step 4: Set the hedging strategy

With the targets set and the budget course, the next questions arise: What currency development can be expected? What is the industry outlook? Is the order situation relatively secure? Or are there practically no empirical values? All these questions are answered in the fourth step together with a professional. Ebury then defines an individual hedging strategy in close consultation with the company.

Step 5: Ensure flexible fitting

It's done: The measures have been defined, now it's time to implement them. While Ebury implements and continuously reviews the steps discussed, the company is well equipped to concentrate on its core business. Unlike traditional financial services providers such as banks, Ebury constantly monitors international trade and political events to advise clients on adjustments to their strategy. The team in Zurich is supported by state-of-the-art technology and international currency analysts. It does not matter whether the changes are driven by the currency market or whether the order situation of the company itself changes. This allows the SME to focus on the operational business, which can be worth its weight in gold in uncertain times like these.

Source and further information: Ebury