The solution exists at the operational level
Currency fluctuations are unpredictable and they involve a good deal of risk that can manifest itself in a variety of ways. Fortunately, corporate management can develop some simple and effective solutions for taking control of profitability in spite of volatile foreign exchange rates.
Taking control of profits in spite of fluctuations in exchange rates is possible as long as one’s analysis is carried out with the right focus, meaning within the company itself. Unfortunately, there are still too many managers who find it difficult to assess and define risks involved in exchange. Some wrongly believe that solutions exist on the exchange markets, where one can find a plethora of offers of all sorts and analysts who, it must be said, don’t always make the right predictions.
Nevertheless, the keys to managing risk with exchange rates are to be found at the heart of the company itself, at the level of daily operations as goods or services are being produced and then marketed, thus generating cash flow and ultimately, profits. In other words, the parameters essential to the healthy management of risk with exchange rates are right in front of your nose, at your company’s operational level.
Indeed, in any company it’s at the operational level that money circulates and that risks involved in exchange rates first occur. Analyzing operations allows a proper diagnosis to be made, identifying and measuring risks as soon as they appear and at the same time, preparing the ground for the development of an exchange rate policy that will ensure managerial control of the situation.
A natural reflex is to associate questions related to risks with exchange rates to those related to foreign exchange contracts. Indeed, this financial instrument (and its variants) is the indispensable tool that allows risks in this area to be mitigated. However, in order to be effective, it must respond to specific needs that have been adequately identified and measured at the operational level.
It must be remembered that risks involved with foreign exchange rates can occur without much warning and there are few reliable indicators that allow you to evaluate the likely financial consequences. You should be particularly wary of making the mistake of relying on financial statements. The picture being shown at any given time is static and even though it might meet accounting standards, it cannot indicate the likely financial consequences of the “mandatory marriage” between the dynamics of your operations and that of fluctuations in the foreign exchange market.
The conclusion is obvious: managing risks on the foreign exchange market is a priority for any modern business. In this context, it is important to consider to invest your company’s know-how in order to fully capture, in both the immediate and long-term, your full potential of being profitable outside of Canada, and thus plan for a future with sufficient safeguards.