Currency Blindness on the Rise as More Midmarket Firms Harbor Global Ambitions

With more middle-market firms seeking to expand their sales overseas and finance teams leaner than ever, it shouldn’t be any surprise that more firms are experiencing currency hedging SNAFUs. Middle-Market Executive recently spoke with Guido Schulz, head of strategic management for AFEX, an FX solution provider, about why privately held middle-market firms may face a bigger FX challenge today than firms many times their size.

MME: With more middle-market firms pursuing sales offshore, you would imagine that the risk of currency exposure is on the rise …

Schulz: We’ve been observing a shift among our customers as the economy has shifted, and if we wind back the clock to, say, 2002 or even before, most of our clients would be those businesses that have traditionally faced a challenge in paying invoices in foreign currency — say, machine tool importers or arts and antiques importers. Now, over the past 10 years, there has been some consolidation of certain markets. For instance, the machine tool sector in the U.S. has taken a huge beating from the European manufacturers, and now they have been supplanted by the Chinese in the maintenance sector. There are still some of them out there, but there is not as wide a variety. So as the traditional import sector has contracted, we’ve seen new industries and companies quickly emerge, especially in the technology sector and different areas of science — for instance, in genetic engineering — where there are very specialized value propositions.

MME: These are companies with very lean finance departments pushing very specialized products?

Schulz: What we see is lean finance departments with people pushing huge volumes very quickly, and we see this among many Internet-based companies. These can often be small boutique shops that may land an alliance with Google or with Apple, and they suddenly have huge currency exposures all over the world. Due to the fact that they are not fully prepared and their focus is on the technology itself, they suddenly realize that they just haven’t considered that their large payment volumes are putting them at risk.

MME: Is currency risk always going to be a greater concern for publicly held firms due to their projections on earnings per share?

Schulz: Well, public firms do have these pressures, but usually you’ll find that they have a pretty good staggered hedging program in place, and that is that. The real danger we see today has to do with up-and-coming companies that are essentially growing overnight, with huge payment volumes, and their entire profit margin can be wiped out by market movements. For example, you’ll find online retailers that may be experiencing heated price competition in the international market. A movement of 2 to 3 percent in any currency could completely eradicate their profit margin. For larger companies, it’s more a question of “Did we do well or did we not do so well?,” and “What does our shareholder value look like?

MME: How does the complexity of managing a firm’s currency exposure grow as a company goes from, say, two currencies to three or four? When do companies knock on your door?

Schulz: Well, in fact, a lot of our clients only have exposure to one currency — for example, an importer of automotive painting equipment from Germany. They are an independent company in the U.S. that has an exclusive contract with a German supplier. So they will pay in euros and that will be their only exposure, but that’s 90 percent of their business. Then you have the other scenario, where a company may suddenly have exposure in several currencies around the world, but I would say that the challenge doesn’t necessarily multiply with additional currencies. It does become slightly more complex. In the end, currency exposure is currency exposure.

MME: What role does technology play when it comes to eliminating the complexity?

Schulz: Technology is only becoming more important. Clearly, there are people who have done this using spreadsheets, but we are seeing a younger generation of CFOs coming up, and these are people who are used to receiving their information via the Web. On our platform, we built in a treasury view functionality that allows the client a consolidated view of all of their inflows and outflows, so they can calculate their exposure. This is just a matter of logging in to the system to see where you’re at and you can pull your reports out in whatever format you prefer.