After a relaxing summer break, the start of the new school year is a time for good resolutions: getting back into sports several times a week, eating balanced meals, reading the latest Goncourt Prize winners… But for treasurers and finance departments, it is also budget forecasting season! And we have to admit that in this area, practices are still sometimes too archaic and static within companies. Here are a few tips for a smooth return to work.

Get data from the heart of the company

Excel spreadsheets and their thousands of rows and columns have their advantages, but they also have their limitations: they only offer a snapshot at a given moment of the company’s financial situation, whereas today it is necessary to be able to consider cash flows in a dynamic and prospective way. This is all the more crucial when it comes to managing financial flows in foreign currencies that are directly impacted by exchange rate risk, a risk factor that cannot be ignored in a world as unpredictable as ours; a world in which the cold showers linked to the Brexit or the eurozone crisis still send shivers down the spines of many companies… Current uncertainties are generating stress, and that is quite normal. But to reassure oneself, it is useless to look for forecasts (most of the time inaccurate) from one’s bankers and advisors. It is important to remember that using your banker as a shrink is never a good idea… Especially when you already know what you want to hear him say! Because cognitive biases are part of human nature, the challenge is to go back to basics for budget forecasts by focusing on the company and all its data in order to have the most accurate global vision possible. In order to sleep soundly, the treasurer should not hesitate to question his subsidiaries, his sales representatives, his buyers… In short, all the links in the value chain and all the stakeholders that will enable him to paint the most accurate picture possible of the company’s situation. Knowing oneself well in order to consider one’s exposure to risks in a serene manner is therefore a crucial first step. This approach can of course be supplemented by external advice when necessary, but an in-depth scan of the company will always be much more reliable and satisfactory than any crystal ball issued by a financial institution.

Your banker is not Madame Irma

Despite what some may say, financial institutions are not capable of anticipating currency movements (especially in a world where a pandemic can destroy many age-old certainties). This statement is not a simple intuition, but the conclusion of a study conducted by the scientific articles site SSRN, and based on the analysis of the expectations of 134 financial institutions integrated in the Bloomberg panel (banks, brokers and online brokers) and the evaluation of their estimates on 30 currencies against the dollar, between June 2006 and June 2020; that is to say, no less than 48,000 forecasts! And the verdict is clear: these players have made and repeated many mistakes with a tendency to overestimate volatility (overconfidence) and to have forecasts similar to others (sheep-like behavior).  Yes, you read it right, with all due respect, it is a safe bet that your advisor is a sheep… So much so that in the long run, investors who follow the recommendations of these professionals are more likely to lose money than if they had just left it to chance. You will agree that when playing dice is smarter than listening to your banker, you urgently need to find a plan B! Faced with this observation, there is a simple solution: use the forward rate, i.e. the rate at which market players are currently committed to exchanging their currencies at a future date. Indeed, in this same study, the forward exchange rate outperforms forecasters (in seven cases out of ten for the most common currencies, and in six cases out of ten for emerging currencies).  As is often the case, there is no magic formula, but a rational approach to the risks associated with a difficult to predict and often irrational market. The DeftHedge solution allows you to view your exposure live (with your hedging information), but also to see its impact on accounting and to make projections of the company’s performance based on forward prices; enough to allow the most anxious among us to get some sleep!

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