Generally speaking, uncertainty is bad for business. But when the global financial crisis erupts, the resulting uncertainties can multiply the challenges faced by companies engaged in international trade. During periods of financial uncertainty—whether stemming from trade wars or other forms of supply chain disruption—the two most severe challenges in international business are cash flow unpredictability and exchange rate volatility.

Uncertain times call for a comprehensive global liquidity management strategy that enables companies to view overseas account balances and activity, mobilize funds, concentrate balances into foreign currency or U.S. dollar accounts back home, and deposit idle cash into interest-bearing accounts.

Monitoring to Address Cash Flow Uncertainty

For domestic companies, a slowdown in accounts receivable is already unfavorable. But for businesses trading globally, which must monitor unpredictable cash flows in multiple currencies, this issue can be even more challenging. With the explosive growth of internet commerce, the number of companies fitting this description is increasing. Adam Toles, Vice President and Group Product Manager in the International Solutions division at Bank of America, suggests that companies should consider treasury management systems that offer a global cash platform to better monitor international cash flows.

When cash flows become increasingly unpredictable, companies with multiple accounts across multiple countries, banks, and currencies can easily find themselves overdrawn in one account or currency. However, if a company uses a global platform that provides a view of cash balances aggregated by country, bank, and currency (see screenshot below), monitoring such issues becomes much easier.

A view of corporate cash balances aggregated by country, bank, and currency using the Bank of America platform.
Used with permission of Bank of America

With such a platform, for example, if you discover that your British pound (GBP) account is overdrawn, you can drill down to see which banks and which accounts are overdrawn, and then transfer funds between accounts to alleviate any pound shortage.

Addressing cash flow uncertainty is crucial. Having a single screen that allows you to view cash across all different currencies enhances your visibility into your company's cash position, thereby supporting more effective cash forecasting.

"Today, many mid-sized companies have accounts in multiple regions to buy and sell goods," says Toles. "A company with accounts at five banks and using three currencies would truly benefit from this visibility and efficiency if it could manage all its cash in one centralized location."

Concentrating Global Funds to Enhance Cash Visibility

To gain a comprehensive, integrated view of your global cash balances, consider concentrating funds or using an overlay structure with Bank of America.

A secure and reliable banking partner in the United States can help you avoid risks associated with holding funds in other countries, such as currency controls or changes in repatriation taxes. Additionally, you can manage and mobilize funds from overseas accounts, concentrating balances into your U.S. bank in foreign currencies or U.S. dollars. You can also use your U.S. bank account as an overlay structure for daily transactions or as a contingency option to supplement overseas bank accounts.

U.S. companies engaged in international business can use Foreign Currency Accounts (FCAs) in the United States to concentrate excess foreign currency cash back home into FDIC-insured accounts. These accounts support multiple currencies and can be opened as resident or non-resident accounts. Furthermore, since FCAs are located in the U.S., they may not require Foreign Bank Account Reporting (FBAR).

Treasury managers at international companies can work with their U.S. bank to choose from a variety of options for investing idle cash, including both U.S. dollar and non-U.S. dollar investment options.

Managing Exchange Rate Volatility

During periods of financial uncertainty, exchange rate movements are often unpredictable and frequently severe.

For international companies, extreme exchange rate fluctuations can have a significant impact on costs and revenues. For example, if you have an agreement with a German company to purchase raw materials at a certain euro price, the euro could appreciate significantly against the U.S. dollar before the transaction is completed, substantially increasing the cost of the purchase. Similarly, for exporters, large exchange rate swings can erode profits from sales to foreign customers.

Fortunately, companies can take steps to mitigate the risk of exchange rate fluctuations, protect assets, and even stabilize costs during unstable times. Here are some strategies recommended by Bank of America experts:

Consider hedging.Currency hedging productsenable companies to lock in a guaranteedforeign exchangerate before a transaction, whether buying or selling.

The simplest hedging solution for managing exchange rate volatility is a forward contract, a basic arrangement where you set a specific date on which you will receive the desired currency at a price agreed upon today.

By selling at euro-denominated prices and entering into a forward contract, a U.S. exporter forgoes the opportunity for additional profit if the euro appreciates against the dollar between the time the price is set and shipment. However, the exporter also eliminates the possibility of losses if the currency market moves in the opposite direction.

Similarly, using a forward contract, a U.S. importer who agrees to pay a supplier in euros knows today what those euros will cost in U.S. dollars when payment is due.

"Hedging is not about betting on whether the market will go up or down," explains Chris Braun, Managing Director of FX Sales at Bank of America. "It's about removing volatility from the market and creating certainty."

Companies can use a variety of other foreign exchange instruments—including foreign currency option contracts—to manage exchange rate volatility. Given the many options available, some treasurers shy away from FX hedging because it seems overly complex. However, there is no need to fear hedging. Your bank's FX sales representative can help you assess whether hedging is appropriate for your company and, if so, recommend suitable instruments and strategies to achieve your objectives.

Ask foreign suppliers to invoice in U.S. dollars (USD) as well as their local currency. By requesting prices in both USD and the supplier's local currency, importers can evaluate the most cost-effective option.

Typically, the USD price will be higher because USD payments require the foreign supplier to perform currency conversion and manage FX risk. However, importers may find it worthwhile to pay a bit more to avoid managing FX risk themselves. "Giving yourself this flexibility can be very powerful," says Toles.

Best Practice: Seek Expert Assistance

Here is one final crucial piece of advice:

Consult your bank's international specialists. During periods of financial uncertainty, companies engaged in international business especially need to consult knowledgeable treasury management and FX banking professionals.

Because regulations vary by country, multiple currencies need to be managed, and processes differ significantly from domestic trade, international trade is a complex and rapidly changing field. "Therefore," says Toles, "whether you need to explore hedging foreign currency risk, negotiate terms with trading partners, or choose an appropriate treasury management system, it is always wise to consult your bank's international specialists."

Paying or invoicing in foreign currencies may seem daunting, but our goal is to make it easy for you.Contact your banking partnerto learn more about foreign exchange services andFX risk mitigation. Your partner can help find services that fit your needs.