What does the Pound’s slump mean to your business?
The sharp drop in the value of the pound comes as the British government grapples with soaring public debt and a cost-of-living crisis, amid deteriorating investor confidence. It also raised the prospect that Britain’s central bank may intervene in currency markets to shore up the pound.
It also looks like this will not be a one-off affect. Larry Summers, the former US Treasury Secretary said – “It would not surprise me if the pound eventually gets below a dollar”, he told Bloomberg TV. We are likely to see a volatile pound against the dollar and other currencies.
This causes quite a big headache for companies as they look to assess the impact and work out to navigate the issues. The finance team is the one that needs to crunch the numbers and support the business in the decision making.
If the pound stays at low levels against the dollar, imports of commodities priced in dollars, including oil and gas, will be more costly. Other imported goods could also become considerably more expensive as well.
It is not just a dollar issue though. Other currencies have been falling against the dollar, and the euro touched a fresh 20-year-low against the US currency amid concerns about the risk of recession.
The BBC highlighted the issue well with this example from Paul Davies, chief executive at Carlsberg Marston’s Brewing Company, he said the fall in the pound was “worrying” for the British beer industry, which imports hops from overseas. He said: “Many of the hops used in this country are actually imported and a lot of them, particularly for craft brewers, are imported from the US, so changes in currency is actually worrying for industry. “Then of course people drink a lot of imported beers from Europe, and the euro vs the pound is also something we’re watching very closely at the moment.”
Besides watching the currency movements closely, what can finance teams do to support the business?
Here are a couple of areas where a great budgeting & forecasting solution can support your business.
What-if and sensitivity analysis: Step one is being able to start to quantify the effect on your business.
If you’re in a good place, you’ve got a comprehensive model of your business in your budget / forecast. One that allows you to see your divisions/ regions in local currencies. Perhaps models out your inputs / raw materials so you can adjust the costs of them.
A good budgeting tool solution will allow you to quickly create a copy of budget (with just a few clicks), this new version can be used to put in some potential changes to exchange rates and raw material prices. A lot of companies will even want to create 5 to 10 of these different scenarios. As a minimum you would want a best case and a worst case. Perhaps some with specific % movements, changes over time etc.
Once you have these versions, being able to present how the compare. Exploring where the crunch points come in the business (a specific region / product line?) is key. You need to be able to put these scenarios against each other and against the original plan. Good supporting analytics will allow you to do that quickly.
All of the above can’t take weeks to do. It needs to be done in a few hours. You also want to engage the business in this conversation, allowing them to see the risks and opportunities. Allowing the sales, marketing, HR teams etc to see these scenarios (and explore them) will enhance how your business makes decisions.
Remove Currency related performance: We still want to view how the underlying business is doing.
Your business also had a budget for the year, the business is operating to that. It’s not always useful to measure performance to that and include the currency movements. Doing that can mask under-lying performance, making it seem better or worse than it actually is.
Most companies in this case will be viewing actuals at budget exchange rates. A common request for finance teams and something most decent budgeting solutions can do. This removes the currency element and allows you to review company performance.
These are just a couple of areas where solutions like Workday Adaptive Planning can help out finance teams and businesses. We’ve put together a short video to illustrate this.
If you would like to explore this further, please contact us.