Here's how those responsible for financial management of an organisation, exposed to currency fluxuations, can safeguard against future hits...
With a recent report showing non-governmental organisations (NGOs) are losing significant amounts of money as a result of the depreciation of the pound since the Brexit referendum, it is clear how important it is for the leaders of these organisations to take action now or risk further losses as uncertainty surrounding Brexit continues.
Aid projects focused on alleviating poverty and mitigating climate change have been highlighted as suffering massive financial losses due to the fall in the value of the pound since the 2016 vote on whether the UK should remain in or leave the European Union (EU). As a result, the important causes and vulnerable people these projects are designed to help have been left under-funded.
The fluctuating pound since the Brexit vote is set to continue, with stability only likely once Brexit deals have been formalised. NGOs with currency exposure should therefore be making moves towards establishing a robust currency management strategy to prevent further losses.
But what should those responsible for the financial management of NGOs be doing to safeguard their organisation from currency hits?
1. Seek the best rate
Firstly, NGOs can alleviate losses and establish some certainty during these turbulent times with better knowledge and awareness about FX and how to get the best rate. Seeking the best currency transfer rate should be a matter of course, and can straight away save significant amounts of money. Rates from specialist FX firms for example, are often a fraction of the cost of major UK banks. Unfortunately, many organisations fall victim to a hidden transfer fee due to a lack of transparency from their FX service provider. This is not acceptable. Simply accepting a standard transfer rate should be avoided. Shop around for a better deal instead.
2. Natural hedge
Not all NGOs obtain funding purely from sources here in the UK and as such revenue flows may often be received in overseas currencies; Euros or US Dollars being the obvious examples. Therefore logically where an NGO carries out projects overseas, but also receives funding in a foreign currency, there could be an opportunity to create a natural hedge.
A natural hedge occurs whereby your costs in an overseas currency are negated by revenues in that same currency. Where these opportunities arise, it would be incredibly prudent to capitalise upon them because your funds are protected against adverse currency market movements, as you no longer have a need to exchange from one currency to another. No losses will therefore be incurred on exchanging currencies through a bank or broker.
3. Forward planning
Although natural hedging is fantastic in theory, in practice, unless you are fortunate with the timing of how the funding and projects align, it is probably not going to occur all the time or maybe even at all. Therefore creating an effective FX strategy and hedging policy is absolutely crucial to protecting hard earned funding. At the heart of any strategy should be forward contracts, as they ‘allow you to secure today’s exchange rate for settlement at an agreed future date.’
For example, your organisation has secured €250K funding from an EU body, with funds to credit towards the end of February 2019. Between now and the end of February, the organisation is completely exposed to movements in the GBP/EUR rate. Brexit is the main driver of sterling currency pairs at present and should a divorce deal be agreed in the interim period, there is a very strong possibility that GBP/EUR will move higher and as a result that €250K will suddenly be worth far less sterling.
By utilising a forward contract, the organisation can lock in today’s exchange rate but for settlement towards the end of February 2019. This therefore means protecting those funds from any adverse movement in exchange rates, securing and knowing the exact amount of sterling to be received come the end of February, and allowing the organisation to plan and budget effectively around the funds now expected.
These strategies are well worth considering by those managing the finances of NGOs, particularly if there is currently no FX strategy in place at all. With prolonged political and economic uncertainty, it is important now more than ever to be aware of how fluctuations in the currency market can influence your operations and how your rates are being managed.
With a robust FX strategy that takes into account seeking the best rate, natural hedging and forward planning, financial loss can be minimised and NGOs can continue to operate without the concern of a major hit because of a fluctuating pound.