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TRANSFORMING TREASURY FOR GROWTH

A s the US economy continues to strengthen, many treasuryteams are wisely reviewing established payment practices toallow them to take full advantage of new growth

opportunities.

A US company that has taken the time to explore and implementfinance and treasury processes that work best with international

suppliers and customers will have greater opportunities to maximiserewards and gain a competitive advantage.

For example, a well-considered review of your Enterprise ResourcePlanning (ERP) system can help you streamline and automate bothsupplier and intra-company international payments. A fresh look atyour supplier master file or payee configurations can also helpdetermine if you’re paying in the best currency with the right

Taking on InternationalSupply Chain FX Risks Treasury and Accounts Payable process changes canhave significant impact

by David Kretz, Cross-Currency Payments Executive, Bank of America Merrill Lynch

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payment instrument. If you receive and process invoices from

foreign suppliers, then designing invoicing,payment and reconciliation processes to payin foreign currencies vs your home currency— and building those processes into yoursystems — could result in significant savingsas well as improved relationships withsuppliers.

Pay in the right currencyAs you look to determine the best currencyfor supplier payments, it’s important to knowthat each situation can vary based oncontract terms and supplier agreement,but generally there are strong benefitswhen payment is made in thesupplier’s local currency.

For local currency payments, thesupplier’s invoice would identify theamount owed in their currency on thedue date. Putting the invoice amountin their currency, rather than yours,helps avoid any conflict with how thesupplier arrived at the amount due inyour currency such as when was itconverted, and at what rate. Now thesupplier is no longer in the business ofmanaging currency risk. At this point, youshould review pricing terms with the supplier.Without the need to account for FX volatilityrisk and conversion mark-ups, suppliers maybe in a position to offer a lower price.

Treasury staff with knowledge in managingFX generally get better FX rates from theirbanks than typical international suppliers thatrely on a local bank. Even companies withnominal FX experience, can generally findmore favourable FX rates with their globalpayments bank, than an international supplierwould from their local bank.

FX and reconciliation challenges The benefits of paying in local currency canbe lost, however, if your process reviewdoesn’t extend to the payment treatment inyour ERP system and resulting reconciliationefforts. Trade payments in currencies otherthan the buyer’s home currency can bedifficult to reconcile and are known tocreate several problems:

� Indicative rates: Differences betweeninvoiced and payment amounts arise if

your company only enters FX rates intoyour ERP or treasury system weekly ormonthly. Such ‘indicative’ FX rates aretypically based on wholesale interbankrates, and will be inaccurate whenpayment is actually due. Consider: The differences betweeninvoiced and payment amounts will besmaller if you enter rates on a daily basisvs weekly or longer.

� Source of FX Rates: Some companies mayput an amount due in their paymentssystem that is based on an FX rateprovided by the supplier on the invoice.These rates may be even older than whenthe invoice was created, and may includeunexpected mark- ups. Consider: Utilise more current ratesprovided by your bank.

� Timing of FX rates: Be aware that whenyou pay a supplier in their base currency,it may be difficult to reconcile the itemlater, since the FX rates applied whenyou entered the invoice to your systemare unlikely to match the FX market rateyou received from the bank at the timeyou initiated an FX Payment.

Consider: Utilising daily refreshed FXrates against local payments terms willimprove your forecasting and therebysimplify your reconciliation efforts.

Additionally, make sure you are aware of thecross-currency payment modules that areavailable for your ERP system if you aren’tcurrently utilising them. You might find thatthey offer significant process support as youmove to supplier local currency payments.

Use the right payment instrumentMost global banks now enable their clientsto tap into the low-value clearing systems ofmany countries. Using the low-valueclearing systems for repetitive paymentshelps increase straight-through processingrates, provides significantly cheapertransaction fees, and minimises the exposureto lifting fees that are often applied to wirepayments.

A one-time effort may be required togather additional banking details from yourpayees, update your vendor master recordfiles, and inform suppliers of the change in

Local currency payment advantages by the numbers

Suppose you owe $10,000 USD to a Hong Kong company and its local bank converts yourUSD payment to Hong Kong dollars. Looking at the interbank HKD/USD FX dealing rate onReuters of 7.700, your supplier would expect to receive approximately $77,000 HKD. If thelocal receiving bank marks up the rate by 2%, then the supplier receives roughly $75,460HKD. However, let’s look at what happens if you pay in the supplier’s local currency, HKD. If youget a 1% FX rate markup from your global payments bank, then your supplier receives$76,230 HKD, an increase of $770 HKD over having its local bank convert a USD paymentinto HKD at a 2% markup. Such savings add up, and could be one of several excellentreasons for your supplier to offer you improved prices.

Utilising daily refreshed FX rates against local payments terms will improve yourforecasting.

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payment method. However, the potentialreduction in fees for both parties may wellbe worth the time spent updating thepayment record files.

Let your bank take the risk?Companies can either manage FX risksthemselves – and absorb the actual volatilityin their payment process – or rely on theirsuppliers to take it on and accept any pricemark-ups they may charge. Of course,companies that own the FX riskmanagement can actively hedge their overallaccounts payable portfolio through FXforwards or options.

Another innovative way to manage FXvolatility and improve reconciliationprocesses is to let your bank assume anintra-day FX volatility risk. You’ll get atradeable rate from your bank on a periodicbasis, and enter it into your ERP or treasuryworkstation - most commonly on a dailybasis - with a refreshed file arriving eachday, although shorter and longer rate lockperiods might be considered.

If the currency moves against you duringthe trading day, you are protected. If thecurrency moves in your favour, however, youwill not get the advantage of the rate, but,in either case, you are relieved of theresponsibility, time and cost of managing FX.

Reconciliation is easier because the FXimplications of the payment are known, andpayments can be booked into the generalledger and cash forecasting tools uponapproval, thus eliminating the need to adjustFX rates that were initially estimated.

Additionally, you can:

� Schedule payments throughout the day� Release payment instructions to your

bank in the afternoon (including alertnotices to your payees of the expectedpayment)

� Instruct your bank of the exact amount topay in foreign currency

Your supplier will know exactly how much toexpect in local currency terms, simplifyingtheir reconcilement and forecasting process.

Analyse system costs and pricebenefitsA detailed and systematic analysis of thecosts and benefits of paying in localcurrencies can also lead to operationalinsights and efficiencies.

The analysis should include the costs of

any system modifications, and training forstaff to use new system modules and learnnew processes, FX management, and riskconsiderations. Generally speaking, any ad-hoc modifications made to ERP systems toaccommodate multi-currency payments arenot as efficient and sustainable as modulesbuilt for such purposes.

Additionally, calculate the effect of lowersupplier prices, potential FX managementsavings, staff savings from reducedinvestigation and reconciliation work. Youshould also quantify benefits for yoursuppliers, which correlate to intangiblebenefits for you, such as improved relationsor competitive advantages.

Your bank can help during the analysis byproviding the tools you’ll need to quantifythe benefits of switching the currency ofpayment and invoice, versus managing FXrisks yourself. Banks can also provideguidance on how they can deliver FX ratesthat can be imported into your system.

You may need to review your investmentpolicy’s risk provisions to ensure you cantake on volatility risk, and consider possiblepolicy changes that would allow you toprocess short-term exposures such assupplier invoices in foreign currencies.Quantifying the cost savings will help justifythe risks.

Reap the benefitsGiven a resurgence in manufacturing, thereis likely to be more international sourcing,and it may well benefit your company’sbottom line to re-evaluate the currency ofyour invoices and to pay some of yoursuppliers in local currencies. �

David KretzCross-Currency Payments ExecutiveBank of America Merrill Lynch

Kretz is responsible for leading foreign exchange products,including FX payments and banknotes, within the Global TreasurySolutions (GTS) Group.

Banks can provide guidance on how they candeliver FX rates that can be imported intoyour system.

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