# FX hedging strategies to protect your business
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-11-30
Category: BUSINESS
Category URL: https://financedigest.com/category/business
Meta Title: How SMEs Can Hedge FX Risk: Tips from Laurent Descout, CEO of Neo
Meta Description: Discover how SMEs can effectively identify, manage, and hedge currency volatility risks to safeguard their businesses from financial losses. Explore key
URL: https://financedigest.com/fx-hedging-strategies-to-protect-your-businesshtml

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_By_ **_Laurent Descout_** _, Co-Founder and CEO of_ [_Neo_](https://www.getneo.com/) _._

_Earlier this year, multinational corporations in the U.S. and Europe_ [_reported a loss_](https://www.kyriba.com/company/newsroom/kyriba-currency-impact-report-reveals-9-half-billion-total-quarterly-fx-headwinds-north-america-european-corporations/) _of $9.5bn in Q1 2021 due to currency volatility.  If even the largest corporates with hedging experts are losing money, how are SMEs expected to fare, with fewer staff and smaller budgets? Laurent Descout, co-founder and CEO at_ [_Neo_](http://www.getneo.com/) _, looks at how businesses can identify, manage and hedge FX risk._

While volatility may be considered “low” for those seeking alpha, many corporate treasurers do not share that view. EUR/USD went from 1.18 to 1.12 over the last 12 months and that in itself is enough to be of great concern to most companies.

There are also meaningful macro changes on the horizon, such as the potential end or softening of quantitative easing policies and higher interest rates, ongoing issues in the global [supply chain](https://www.financedigest.com/2023-supply-chain-trends-for-businesses-to-ensure-a-more-efficient-supply-chain-strategy.html "2023 supply chain trends for businesses to ensure a more efficient supply chain strategy") and a shortage of drivers for goods transportation in some countries. FX hedging and [risk management should remain at the top of the agenda for most corporate](https://www.financedigest.com/managing-corporate-currency-risk-the-cfos-balancing-act.html "Managing Corporate Currency Risk: The CFO’s Balancing Act") treasurers.

With this in mind, here are some simple ways you can help [protect your business](https://www.financedigest.com/finalised-pan-european-data-protection-laws-set-the-new-standard-for-a-privacy-friendly-business-environment.html "Finalised Pan-European data protection laws set the new standard for a ‘privacy-friendly’ business environment") from FX risk:

**Create your hedging strategy**

Many SME owners don’t have a corporate hedging strategy in place. Rather, they rely on spreadsheets for their forecasting, cash flow and accounts and stock management. This is simply not feasible nor sustainable.

Regardless of your business size or revenue, we are all affected by geopolitics, trade issues, tariffs and more – all of which can affect currency movements or the amount you [pay for goods and services](https://www.financedigest.com/best-paying-jobs-in-finance-consumer-services.html "Best Paying Jobs in Finance Consumer Services"). Many of the largest corporations spend tens of millions on banks and consultants for the best advice, but [small businesses](https://www.financedigest.com/10-dirty-tricks-for-small-businesses-to-watch-out-for-when-negotiating.html "10 dirty tricks for Small Businesses to watch out for when negotiating") are not afforded the same luxury.

Fortunately, recent advancements in fintech mean it is possible to [access all the key services SMEs need](https://www.financedigest.com/55-of-uk-smes-unable-to-access-all-funding-needed-to-grow.html "55% of UK SMEs unable to access all funding needed to grow") for their corporate hedging strategy – multiple currency accounts, automated payments and collections, forecasting tools, FX hedging and risk management – at an affordable cost.

So why wait? Do your research and find the best system for your business.

**Identify the risks and set your priorities**

It is crucial to identify where the currency [risks are in your business](https://www.financedigest.com/aon-assists-freddie-mac-to-reach-5bn-risk-transfer-milestone-for-u-s-mortgage-credit-business.html "AON ASSISTS FREDDIE MAC TO REACH BN RISK TRANSFER MILESTONE FOR U.S. MORTGAGE CREDIT BUSINESS"). It could be related to cash on your balance sheet, payables, receivables or a specific [contract with a new supplier](https://www.financedigest.com/french-energy-suppliers-will-let-struggling-bakers-renegotiate-contracts-le-maire.html "French energy suppliers will let struggling bakers renegotiate contracts – Le Maire").

Once you have pinpointed the biggest areas of risk, set your priorities. For a [small business](https://www.financedigest.com/2021-the-year-of-the-global-workforce-for-british-small-businesses.html "2021: The Year of the Global Workforce for British small businesses "), it is difficult to mitigate all of the currency risks all of the time – especially if you’re implementing a corporate hedging strategy for the first time.

There is no “one size fits all” approach, but we have seen strong demand for simpler hedging products such as FX forwards and vanilla options. These hedging products are simple and secure, easy to understand, are relatively liquid and can be unwound easily if market conditions or risk appetite change

Be realistic and [set short-term and long-term targets](https://www.financedigest.com/eu-sets-recycling-reuse-targets-to-cut-packaging-waste.html "EU sets recycling, reuse targets to cut packaging waste"). [Focus initially on the areas that are likely to affect your business](https://www.financedigest.com/which-kpis-should-a-budding-business-focus-on-for-sustained-growth.html "Which KPIs should a budding business focus on for sustained growth?") the most and build from there. Set timeframes for evolving and expanding your strategy. Remember, Rome wasn’t built in a day!

**Choose a suitable partner**

A decade ago, many corporates had specialists in-house and external advisers dedicated to treasury management, corporate hedging and how, when and where they should [buy or sell currencies in order to secure the best exchange rates](https://www.financedigest.com/beat-the-exchange-rate-and-buy-that-dream-holiday-home-by-paying-in-pounds.html "Beat the exchange rate and buy that dream holiday home – by paying in pounds! ").

Evolution in technology, lower barriers to accessing advanced systems and knowledge sharing have rendered much of this irrelevant for SMEs. However, there are still a couple of key things to look for in a partner.

To start with, check they are regulated to provide [payments and currency-related services](https://www.financedigest.com/igtbs-payments-services-hub-faq.html "iGTB’s Payments Services Hub – FAQ"). If they offer an automated or cloud-based service, make sure they have robust technology, operational and security features in place.

Second, ensure you are offered direct market access to credible currency exchanges and venues, and hedging [products that you understand](https://www.financedigest.com/understanding-management-theories-and-maximising-productivity.html "Understanding management theories and maximising productivity"). This cuts out the need for a bank and will [save you money](https://www.financedigest.com/how-to-save-money-on-business-tripsabroad.html "How to save money on business trips abroad") in the long-term.

Third, make sure there is full transparency in relation to the FX fees you are charged. Historically, this has been an area of contention and SMEs can easily overpay without realising they are doing so.

**Spread your money across multiple accounts**

You may not be familiar with this concept, but this is something that is increasingly gaining popularity, especially if you are exposed to different currencies.

Many SMEs are required to have different bank accounts for different currencies, many of which operate in silos. As a result, they are unable to view their cash flow in real-time and lack full [financial visibility across their business](https://www.financedigest.com/setting-the-pace-cognitive-financial-planning-and-analysis-for-business-agility.html "Setting the pace – Cognitive financial planning and analysis for business agility").

Some SMEs are still reliant on [banks to execute and exchange their currency orders](https://www.financedigest.com/austrian-regulator-orders-system-relevant-banks-to-up-capital-buffers.html "Austrian regulator orders system-relevant banks to up capital buffers"), resulting in long lead times and high commissions.

A multi-currency account service (also known as an IBAN) is a great option for holding currencies and organising your funds. As you are receiving or making the payment in the same currency as your counterparty, there is no need to hedge or convert it. You can access the currency immediately, which improves cash flow.

**Make use of data and analytics**

[Every SME’s](https://www.financedigest.com/legislate-raises-3-6m-to-give-startups-smes-the-technology-to-query-and-compare-every-contract.html "Legislate raises .6M to give startups & SMEs the technology to query and compare every contract") trading history, payment cycles and cash reserve levels are different. [Business owners make decisions to manage](https://www.financedigest.com/four-reasons-whycloud-based-inventory-management-is-important-for-your-ecommerce-business.html "Four reasons whycloud-based inventory management is important for your ecommerce business") these on a daily basis, but how can you be sure that the decision you make is the right one, and it is made at the right time?

What many [business owners may not realise is that they are sitting on a treasure trove of information that could go a long way](https://www.financedigest.com/5-ways-to-grow-your-business-despite-a-bad-credit-score.html "5 Ways to Grow Your Business despite a Bad Credit Score") towards helping them in this regard. By using tailored data and analytics derived from their company’s history of trading, payments and cash flow, [business owners](https://www.financedigest.com/5-reasons-why-you-need-to-step-into-your-ceo-role-as-a-small-business-owner.html "5 Reasons why you need to step into your CEO role as a small business owner") can have a complete view of their corporate behaviour, backed by unique data and intelligence.

Ever wondered if payments are made on time, or even too early? Or what percentage of customer payments are delayed, and by how much? Are there common trends that are being overlooked? How can temporary cash shortfalls be addressed more effectively?

Knowing the answer to such questions and more can result in improved forecasting, detecting patterns and anomalies and automating processes. This enhances financial decision-making, risk management and cash flow monitoring. Critically, the answers derived from these analytics are unique to each business.

**Innovate to** [drive efficiency](https://www.financedigest.com/iforces-route-genie-to-drive-efficient-carrier-management-for-freestylextreme.html "IFORCE’S ROUTE GENIE TO DRIVE EFFICIENT CARRIER MANAGEMENT FOR FREESTYLEXTREME")

SMEs are often the biggest drivers of innovation and economic growth. It is crucial that they adapt and evolve their existing processes to [overcome the current challenges](https://www.financedigest.com/5-challenges-to-overcome-in-governance-risk-and-compliance-magazine.html "5 Challenges to Overcome in Governance, Risk and Compliance-Magazine"). Technology is the [key to achieving greater efficiency](https://www.financedigest.com/1-easy-tip-to-make-a-key-e-commerce-process-more-efficient.html "1 easy tip to make a key e-commerce process more efficient").

The past 12 months highlight the importance of accurate forecasting and protecting against sudden movements in currencies. These can affect the cost of raw materials, import and export costs, margins and ultimately, profits.

In this period, we have seen our clients hedge their supply costs and [lock](https://www.financedigest.com/dutch-telecom-kpn-locks-in-2023-targets-helped-by-cost-controls.html "Dutch telecom KPN locks in 2023 targets helped by cost controls") in prices for the foreseeable future to provide certainty regarding the cost of purchases. This has been proven to be even more important as raw material and shipping costs, which are mostly denominated in USD, surged.

It is [time to shake off Excel and embrace the technologies that the largest companies in the world have been utilising for years](https://www.financedigest.com/why-the-new-year-is-the-best-time-to-start-your-dream-tech-business.html "Why the New Year is the best time to start your dream tech business"). This will reduce time constraints, offer [greater oversight of your business](https://www.financedigest.com/keeping-data-connected-for-greater-business-value.html "Keeping Data Connected for Greater Business Value") in real-time, and derive analytics and intelligence to help you make better decisions.


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