Growing businesses need an FX policy, before currency exposure becomes a risk
When I founded APA, one of the clearest challenges I saw for internationally growing businesses was how fragmented the movement of money had become. FX, payments, banking, treasury and, increasingly, digital assets were often treated as completely separate problems.
That is beginning to change. I believe the next generation of global businesses will increasingly expect money to move across currencies, countries and payment rails far more seamlessly. But before businesses can take advantage of that future, they still need to get the fundamentals right - and currency risk is one of the most important places to start.
For many growing businesses, currency risk creeps up gradually. Overseas sales increase, suppliers start billing in more currencies and individual contracts get larger. At first, the finance team can handle each conversion as it comes. Then the exchange rate moves sharply and suddenly a project’s margin is lower than expected or cash flow has shifted away from budget.
All too often, that’s when I see businesses take currency risk seriously. Unfortunately, it’s also a difficult time to make a considered decision. The market has already moved, management wants protection quickly and there may be no agreed way to respond.
Businesses that are growing internationally need to have a framework in place, before volatility forces them to act.
Start with what you’re trying to protect
An FX policy should begin with a straightforward question: what financial outcome is the business trying to protect?
That might be cash flow, a budget rate, the margin on individual contracts, reported earnings or a combination of these. The aim is usually to keep currency movements within an acceptable range and make financial outcomes more predictable. It shouldn’t be about trying to call the market correctly every time.
Be clear about what counts as an exposure
The policy should define when a FX management becomes necessary. Is it when a contract is signed, a purchase order is committed, an invoice is issued or a forecast reaches an agreed level of certainty?
It should also cover whether exposures are managed individually or after reliable inflows and outflows in the same currency have been matched against each other.
We’ve found that this exercise often reveals wider inefficiencies. The same currency might be getting converted several times, different subsidiaries could be handling similar exposures in different ways, or commercial teams may be agreeing long payment terms without considering the FX impact.
Those inefficiencies matter because FX rarely exists in isolation. As businesses expand, currency management becomes increasingly connected to how they collect money, where they hold liquidity, how they pay suppliers and which financial rails they use to move funds around the world.
Set the rules before you need to make the decision
A practical FX policy should cover:
- Which currencies and types of exposure are included
- Appropriate hedge ranges and time horizons
- Which instruments can be used
- Approval and dealing limits
- Approved counterparties
- Reporting requirements and processes for exceptions
The policy can allow for different approaches depending on how certain an exposure is. For example, the business might hedge a larger proportion of near-term committed payments and a smaller proportion of longer-term forecasts.
There’s no single hedge ratio or time horizon that works for every company. The right approach depends on how predictable the company’s cash flows are, how tight its margins are and how much volatility it can comfortably absorb.
Don’t let forecasts become the policy
A view on where a currency is heading can influence how currency is managed, but it shouldn’t replace the agreed policy.
Without that discipline, we’ve seen businesses delay hedging because they expected the exchange rate to move in their favour. If it’s moved against them instead, they’ve had to rush to increase their protection at a less attractive rate.
A clear policy gives the business a repeatable process. It also means the approach can continue consistently across subsidiaries, changes in personnel and periods of rapidly shifting market sentiment.
Keep it proportionate
An FX policy doesn’t need to be a complicated document. A growing company can start with a concise framework covering its objectives, scope, responsibilities, limits, approvals and reporting. It can then evolve as the business expands.
It should also include clear triggers for reviewing the policy. Entering a new market, adding another currency, exceeding an exposure threshold, introducing a new instrument or seeing forecast accuracy decline could all justify another look.
The best time to put an FX policy in place is while the exposure still feels manageable. That gives you time to decide how to respond, instead of letting the next bout of currency volatility make the decision for you.
APA works with growing international businesses to proactively manage currency risk, offering spot transactions, forwards and specialist support to help finance teams turn their FX policies into action.
If your international revenues or costs are starting to become material, speak to APA about how our global financial infrastructure can give you more control over your FX risk.
