A finance team’s guide to managing foreign exchange risk

Foreign Exchange

When a company trades in goods or services overseas, or makes international inter-company transactions, it needs to minimise or mitigate the associated foreign exchange risks. It used to be the domain of large multinationals, but the increasingly global nature of business means FX exposure is now a daily concern for many mid-market companies.

In this blog we outline:

• The key FX terms and concepts finance teams need to know
  
  
• The FX challenges facing mid-market finance teams
  
  
• How finance teams can manage FX risk.
  
  

Introduction: What is foreign exchange risk?

Companies incur foreign exchange risk when they conduct financial transactions in a currency other than their base currency. The risk lies in the fact that exchange rates can move between the time a transaction is agreed and when it’s settled—potentially reducing profitability. This is also referred to as FX risk, exchange rate risk, or currency risk, and the value exposed to this risk is called your FX exposure.

There are broadly three types of FX risk exposure:

• Transaction – when you invoice or pay for goods or services in a foreign currency, there's a risk that the exchange rate moves unfavourably between the agreement and payment dates
  
  
• Operational – FX fluctuations can impact projected or recurring cashflows
  
  
• Accounting (or translation) – when converting foreign assets and liabilities into your reporting currency for financial statements
  
  

In the complex world of international trade, FX exposure is shaped by a mix of internal and external factors:

Internal risk factors

External risk factors

Lack of financial visibility, particularly cashflow and liquidity

Currency market volatility

Inaccurate or siloed forecasting

Fluctuating interest rates

Fragmented or manual data processes (e.g. Excel)

Supply chain disruptions, global instability

Many of these external factors—such as global conflict or economic policy shifts—are hard to predict and control. Yet, finance teams that achieve visibility over their cashflows and exposures are better positioned to create robust FX risk policies. Many also choose to work with an FX provider to reduce risk, streamline admin and access better rates.

The key FX terms and concepts finance teams need to know

Foreign Exchange

Spot Exchange Rate

The spot rate is the live exchange rate at which one currency is traded for another. It reflects the current market price and is typically what’s recorded in your P&L.

When businesses transact in foreign currencies—say, receiving USD into a EUR account—banks often apply the default spot rate, which is rarely favourable. To avoid this, most companies take a more strategic approach known as ‘self-hedging’. This might mean:

• Opening a foreign currency account or local entity to manage receipts and payments directly
  
  
• Partnering with an FX provider to negotiate better rates, especially for lower-frequency transactions
  
  

Businesses are typically exposed to FX risk when they:

1. Pay international expenses such as software subscriptions, digital ads or travel with a credit card
   
   
2. Pay suppliers in foreign currencies
   
   
3. Repatriate profits from overseas subsidiaries
   
   

In the first two scenarios, you’re paying at the current spot rate. The third scenario—transferring profits or repaying loans between group entities—is more complex and often where working with an FX provider becomes essential. It can help you lock in better rates and reduce volatility exposure.

FX Fees

FX fees are a significant area for potential savings. Banks typically charge between 2–5% (200–500 basis points) per transaction. However, by using an FX provider—either directly or integrated into your finance system—you can often reduce this to around 0.5% (50 basis points), leading to considerable cost efficiencies at scale.

FX hedging

Hedging is a common way to reduce exposure to FX risk. It functions much like insurance—providing cost certainty by locking in a future exchange rate.

Let’s say a foreign subsidiary expects to earn $1 million in profit, and the group’s reporting currency is GBP. If that profit is going to be repatriated, it may make sense to hedge the exposure. You could, for example, use a forward contract or an FX option to lock in an exchange rate that protects the business against a drop in USD value. The same logic applies to intercompany loans or investments—hedging helps you manage future FX movements.

Having access to accurate, real-time data is fundamental. It enables you to identify and measure FX exposures and make informed decisions around spot transactions, forward contracts and hedging strategies. Even relatively modest FX volumes—say, £500,000 annually—can carry an unhedged cost of £15,000 or more.

FX Options (also known as Forex or Currency Options)

FX options are derivative instruments that give the holder the right, but not the obligation, to exchange one currency for another at a pre-agreed rate on a future date. They’re a flexible tool for hedging, and come in two main types:

• European-style options: These can only be exercised on a specific date. For instance, securing a € hedging rate for a $1M sale within a three-month window.
  
  
• American-style options: These allow for settlement at any time before expiry, offering added flexibility depending on when the underlying transaction occurs.

The FX challenges facing mid-market finance teams

Mid-market finance team

Finance teams operating in a multi-currency environment typically fall into one of two categories:

1. Trading in multiple currencies within a single legal entity
   
   
2. Operating within a group structure, where the parent company reports in one currency and subsidiaries transact in others
   
   

In either case, they face a host of day-to-day accounting challenges, including:

Budgeting
You need a reliable and up-to-date table of exchange rates to:

• Manage FX transactions within your P&L
  
  
• Perform balance sheet revaluations
  
  
• Track against fixed or variable budgets across entities
  
  

Automatic data capture and reporting
It’s essential to capture revenue and expenditure at the correct rate, and have the ability to report in both local subsidiary currencies and the group’s base currency—often using a pre-determined average rate.

Month-end revaluations
You must be able to revalue all FX-related balance sheet items using an accurate month-end exchange rate.

How can finance teams manage FX risk?

In an environment shaped by persistently high interest rates, inflationary pressures and global uncertainty, one thing remains constant: CFOs must actively manage FX risk and understand how it affects the balance sheet.

Yet surprisingly, many mid-sized businesses still lag behind. In fact, as far back as 2019, a survey by American Express and YouGov found that 43% of UK SMEs weren’t managing their FX risk at all. While awareness has grown in recent years, it remains an area of vulnerability for many finance teams.

Here are three key ways to strengthen your FX risk management strategy:

1) Have the right finance technology in place

If you’re trading in multiple currencies, you need a Financial Management System that includes built-in treasury management functionality. Trying to manage multi-currency processes in spreadsheets is not only time-consuming—it’s also highly prone to error. You risk poor visibility, inaccurate reporting and missed opportunities to hedge effectively.

2) Ensure you have a reliable data source

Clear and real-time data is the foundation of any effective FX strategy. You’ll need access to consolidated and up-to-date exchange rate data, particularly if you’re using financial instruments like hedging contracts. It’s vital to integrate data across all your core finance and operational systems so that exposures can be identified early and addressed appropriately.

3) Work with an FX partner

Partnering with a dedicated FX provider can help streamline international payments and reduce costs. For example, AccountsIQ integrates directly with TransferMate, enabling businesses to access competitive FX rates and process cross-border payments seamlessly from within the platform. This reduces manual handling, improves speed of settlement and lowers transaction fees.

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Managing FX risk effectively is critical for businesses with international operations. As AccountsIQ’s CEO, Darren Cran, puts it:

“We’re living in what’s often referred to as VUCA* times. Multiple disruptive events are happening simultaneously—whether geopolitical conflict, economic shifts or global supply chain disruptions. That inevitably brings greater currency volatility.

It’s not just major currencies under pressure—secondary currencies can be even more unpredictable. In this environment, having a solid treasury management strategy is essential. That means getting the best spot rates and ensuring you’ve got a clear hedging plan in place.”

*Volatility, Uncertainty, Complexity and Ambiguity

Find out more about AccountsIQ’s FX accounting software

While we don’t offer advice on specific hedging strategies, our FX functionality is built to help finance teams reduce risk and improve visibility.

Many of our multi-entity, international customers—such as Integra Technical Services—use AccountsIQ to manage complex intercompany and FX accounting processes with ease.

“It’s easy to map through and check you’re using the right FX,”
says Sue Evans, Financial Controller at Integra Technical Services.

“Previously, it was complicated, and we spent a lot of time working out variances. With AccountsIQ, you just know it aligns. In fact, we only need to do our FX updates monthly rather than daily. It’s so much better.”

Stay tuned for more insights on managing foreign exchange risk in future blog posts - and don’t hesitate to book a demo with one of our experts to see how we can help you navigate FX challenges.

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