Using foreign exchange gains/losses to reduce costs.

• Author: Koester, Wolfgang
• Position: Treasury

Finance departments are not immune to cost cutting and expense-reduction measures. Despite expanded responsibilities and the increasingly critical role of treasury in managing cash and mitigating foreign exchange risk, treasurers and controllers are being asked to do much more with much less.

But treasurers have an opportunity to mine the sources of costs under their purview to target unnecessary and avoidable costs.

By focusing in on the one line in the income statement where they have the most control--"Other Income and Expenses"--treasurers can find opportunities to reduce costs on an ongoing basis. The best place to start: foreign exchange gains/losses.

The Cost of Doing Global Business

With United States multinationals racking up millions of dollars in quarterly foreign exchange losses in the second half of last year, companies have finally begun to recognize FX risk for what it is--the cost of doing business internationally.

Home Depot Inc., which reported $40 million in foreign exchange-related losses, is just one example of a company that got hit in the fourth quarter of 2008. Those losses were the financial equivalent of about one-half of the corporate lay-offs the company announced.

Putting FX losses into this context is exactly what treasurers need to do if they want to contribute real value to their organizations in these difficult financial times.

FX gain and loss has historically been regarded as a function of accounting rather than an economic imperative. In a less volatile and less global marketplace, the impact companies reported from foreign currency volatility were largely immaterial. Currency shifts were mild and the relative volume of international business was modest.

Since then, the face of business has radically changed into a 24-7 global economy. Today, the United States Council Foundation reports that foreign affiliates account for half of the net income of U.S. multinationals, up from 24 percent in 1994.

And though the stakes have been raised for companies in the global market, so, too, have the risks. The British Bankers Associated projects a rise in foreign currency volatility to 13.9 percent in 2010, up from 4.9 percent in 2000.

Old Rules and Tools Don't Apply

With U.S. companies swiftly and suddenly caught in the convergence of these trends, it's time for treasurers to adjust their systems and processes to address the new realities of foreign exchange. Today, treasurers need complete FX data, timely FX...