Published: January 01, 2000
As the US economy continues to strengthen, many treasury teams are wisely reviewing established payment practices to allow them to take full advantage of new growth opportunities.
A US company that has taken the time to explore and implement finance and treasury processes that work best with international suppliers and customers will have greater opportunities to maximise rewards and gain a competitive advantage.
For example, a well-considered review of your Enterprise Resource Planning (ERP) system can help you streamline and automate both supplier and intra-company international payments. A fresh look at your supplier master file or payee configurations can also help determine if you’re paying in the best currency with the right payment instrument.
If you receive and process invoices from foreign suppliers, then designing invoicing, payment and reconciliation processes to pay in foreign currencies vs your home currency — and building those processes into your systems — could result in significant savings as well as improved relationships with suppliers.
As you look to determine the best currency for supplier payments, it’s important to know that each situation can vary based on contract terms and supplier agreement, but generally there are strong benefits when payment is made in the supplier’s local currency.
For local currency payments, the supplier’s invoice would identify the amount owed in their currency on the due date. Putting the invoice amount in their currency, rather than yours, helps avoid any conflict with how the supplier arrived at the amount due in your currency such as when was it converted, and at what rate. Now the supplier is no longer in the business of managing currency risk. At this point, you should review pricing terms with the supplier. Without the need to account for FX volatility risk and conversion mark-ups, suppliers may be in a position to offer a lower price.
Treasury staff with knowledge in managing FX generally get better FX rates from their banks than typical international suppliers that rely on a local bank. Even companies with nominal FX experience, can generally find more favourable FX rates with their global payments bank, than an international supplier would from their local bank.
The benefits of paying in local currency can be lost, however, if your process review doesn’t extend to the payment treatment in your ERP system and resulting reconciliation efforts. Trade payments in currencies other than the buyer’s home currency can be difficult to reconcile and are known to create several problems:
Additionally, make sure you are aware of the cross-currency payment modules that are available for your ERP system if you aren’t currently utilising them. You might find that they offer significant process support as you move to supplier local currency payments.
Most global banks now enable their clients to tap into the low-value clearing systems of many countries. Using the low-value clearing systems for repetitive payments helps increase straight-through processing rates, provides significantly cheaper transaction fees, and minimises the exposure to lifting fees that are often applied to wire payments.
A one-time effort may be required to gather additional banking details from your payees, update your vendor master record files, and inform suppliers of the change in payment method. However, the potential reduction in fees for both parties may well be worth the time spent updating the payment record files.[[[PAGE]]]
Companies can either manage FX risks themselves – and absorb the actual volatility in their payment process – or rely on their suppliers to take it on and accept any price mark-ups they may charge. Of course, companies that own the FX risk management can actively hedge their overall accounts payable portfolio through FX forwards or options.
Another innovative way to manage FX volatility and improve reconciliation processes is to let your bank assume an intra-day FX volatility risk. You’ll get a tradeable rate from your bank on a periodic basis, and enter it into your ERP or treasury workstation - most commonly on a daily basis - with a refreshed file arriving each day, although shorter and longer rate lock periods might be considered.
If the currency moves against you during the trading day, you are protected. If the currency moves in your favour, however, you will not get the advantage of the rate, but, in either case, you are relieved of the responsibility, time and cost of managing FX.
Reconciliation is easier because the FX implications of the payment are known, and payments can be booked into the general ledger and cash forecasting tools upon approval, thus eliminating the need to adjust FX rates that were initially estimated.
Additionally, you can:
Your supplier will know exactly how much to expect in local currency terms, simplifying their reconcilement and forecasting process.
A detailed and systematic analysis of the costs and benefits of paying in local currencies can also lead to operational insights and efficiencies.
The analysis should include the costs of any system modifications, and training for staff to use new system modules and learn new processes, FX management, and risk considerations. Generally speaking, any ad-hoc modifications made to ERP systems to accommodate multi-currency payments are not as efficient and sustainable as modules built for such purposes.
Additionally, calculate the effect of lower supplier prices, potential FX management savings, staff savings from reduced investigation and reconciliation work. You should also quantify benefits for your suppliers, which correlate to intangible benefits for you, such as improved relations or competitive advantages.
Your bank can help during the analysis by providing the tools you’ll need to quantify the benefits of switching the currency of payment and invoice, versus managing FX risks yourself. Banks can also provide guidance on how they can deliver FX rates that can be imported into your system.
You may need to review your investment policy’s risk provisions to ensure you can take on volatility risk, and consider possible policy changes that would allow you to process short-term exposures such as supplier invoices in foreign currencies. Quantifying the cost savings will help justify the risks.
Given a resurgence in manufacturing, there is likely to be more international sourcing, and it may well benefit your company’s bottom line to re-evaluate the currency of your invoices and to pay some of your suppliers in local currencies.
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