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The Use of Cash Flow Forecasting as a Risk Management Tool

Corporate Earnings continue to be negatively impacted due to FX volatility and the impact is hitting the bottom line through diminished shareholder value.…

By Dr. Duncan Cole, Liquidity Management Services, Treasury and Trade Solutions, Citi
 and Marguerite Carberry, TreasuryVision Global Product Management, Treasury and Trade Solutions, Citi | Updated on September 28, 2015

Corporate Earnings continue to be negatively impacted due to FX volatility and the impact is hitting the bottom line through diminished shareholder value. Cash flow forecasting, as a component of FX and liquidity risk management processes, can be the key in the preservation of corporate earnings and the realization of greater economic value generated offshore. Put another way, not having cash flow forecasting embedded as part of a broader set of FX and liquidity risk management initiatives is in effect jeopardizing the value of future sales revenues in non-functional currencies, not locking in the cost of goods sold and hence may impact restated earnings.

FX risk is now a key driver of corporate earnings volatility and hedging earnings has become even more critical given the increasing share of corporate profits coming from overseas.1 The strengthening US dollar is driving North American based multi-nationals to better manage their currency translation risk to protect against diminished returns when restating their offshore earnings. While the majority of multinational corporates hedge to varying degrees, many US corporations have reported negative impacts from USD strength in recent quarters and the potential for more downside risk in coming quarters. FX Volatility is having a material impact on corporate earnings.2 With history suggesting continued US dollar appreciation in the current cycle, there is an increasing need for corporations to review their FX and liquidity risk management practices and policies.

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