Sales is trumping finance as more and more companies take on currency risk, then learn how to manage it. The tools keep getting better, but not everyone has a full kit.

Competitive pressures are convincing increasing numbers of U.S. businesses to sell abroad in local currencies and take on the operational headaches and financial risks that come with foreign currency collections. They're finding plenty of help from banks and software vendors which offer tools that can make the process either relatively simple or quite sophisticated. However, progress has been uneven. Archaic practices survive, and the gap between the shrewd and the naive is a wide one, experts report.

The currency on a given invoice generally is dictated by competition. "U.S. exporters will bill in dollars when they can get away with it," says international treasury management consultant Michèle

Allman-Ward, managing partner of Allman-Ward Associates Inc. in Los Angeles. High-tech companies, for example, often can bill in dollars and still make sales. But sellers that face local competition are increasingly having to bill in the local currency because customers are demanding it, she notes.

Although exporters have always resisted selling in anything but the dollar, improvements in accounting systems and bank services make it easier for U.S. companies to say yes to foreign customers who want to be billed in their own currency, reports Bob Johnson, executive vice president for global trade and international cash management at FleetBoston Financial Corp. "You don't have to be rocket scientists or employ currency traders to get sales and protect your margins," he says.

As companies learn to manage relationships with overseas customers who demand that they be billed in the local currency, the finance department becomes better prepared to accept foreign exchange (fx) risk in other transactions. Many companies use the payment currency as a negotiating point in sales or offer sales in local denominations as a value-added benefit of purchasing from them, notes consultant Susan H. Griffiths, partner at Treasury Alliance in Lake Bluff, Ill. But progress isn't always steady. The September 11 attacks rocked a lot of smaller exporters, which backed off from selling in foreign currencies and have yet to regain their confidence, reports Carissa Burns, sales director for corporate accounts on the currency risk management desk at Wachovia Bank in Charlotte, N.C.

A weaker dollar and stronger euro may be temporarily easing the pressure to accept foreign currency payments. When the dollar started to fall last spring, buyers in other countries became more willing to be billed in dollars, Griffiths reports. "It's cheaper for them now," she notes.

Knowledge Gap

The availability of better tools is putting skillful fx management within the reach of more and more finance teams. Many midmarket and even small companies have multicurrency accounting systems that make it relatively easy to do costing and pricing in dollars but to quote, sell and then bill in other currencies, reports Paul French, executive chairman and founder of Equitant Inc., an order-to-cash outsourcing firm with headquarters in Dublin, Ireland, and Sacramento, Calif. "That part is now relatively straightforward," he observes.

The more sophisticated financial systems can also take feeds of fluctuating currency values and adjust cash forecasts, French says. Rather than adjusting the value of accounts receivable, changes in the value of receivables denominated in foreign currencies are taken as a gain or a loss on the P&L accounting record, he notes.

In addition, financial software vendors are teaming up with banks to incorporate various payment formats into their software so that foreign-currency payments can be automated. XML standards for payments over the Internet may supplant bank-specific formats in the future, reports Steve Miranda, vice president of financial applications development for Oracle Corp. in Redwood Shores, Calif.

Still, what happens in the real world is often dramatically different from the easy currency management promised by state-of-the-art software, Griffiths insists. Big multinationals learned long ago to use their own distributors or subsidiaries in countries where they do a lot of business, she reports. Small exporters tend to be less sophisticated, so they don't hedge and they resist selling in currencies other than the dollar. "Some of them still don't have multicurrency accounting systems and would have to enter the currency transactions manually, something they are loath to do," she says.

Another stumbling block is that exporters don't always require payment by wire transfer, Griffiths notes. Most companies specify that they want to be paid by wire, but many continue to receive checks. Sellers lose weeks of float on payments sent as paper checks.

Problems are compounded when U.S. companies with modest export activity fail to bring treasury into the loop to help manage foreign receivables. "Even if they bill in dollars and there's no fx risk, money still has to move. Arrangements will be more rational if treasury is involved," Griffiths says.

Hedging Acumen

Hedging is an old, established method for offsetting losses caused by shifting currency exchange rates. The basics are well-understood, but some of the sophisticated products and strategies border on rocket science. With simple hedges, you effectively lock in an exchange rate by setting up offsetting positions; a move against you is balanced by a move in your favor, and vice versa. If you hedge, when you receive the payment, you get the rate you locked in. If you don't hedge, you get the spot rate at the time you make the deposit in your bank, Griffiths explains. Hedging is popular among multicurrency billers because, unlike customers, they have no opportunity to speed up or delay payments to capitalize on movements in exchange rates; they are completely at the mercy of the market, she notes.

But plain-vanilla hedging is going out of fashion. With major currencies moving, treasury pros want to get an upside bounce rather than simply locking in static rates, Wachovia's Burns notes. Now that the dollar is weaker, companies that used pure hedges are paying an opportunity cost, she notes. The more prominent the currency you're selling in, the fancier you can get with hedge structures. For example, instead of hedging foreign-currency receivables with forward contracts -- the popular tool in Hedging 101 -- some companies are amortizing cross-currency swaps to create very economical offsetting liabilities in other currencies, especially the yen. They are capitalizing on low Japanese interest rates, she says.

Moving the Money

Neutralizing risk isn't the only challenge of foreign-currency sales. The act of receiving payments can also be complex. To concentrate payments received in other currencies without converting them, finance executives use multicurrency accounts that can be located either onshore (in which case they cannot earn interest) or offshore, says Eric Brewer, international product business line manager for Wachovia Treasury Services in Winston-Salem, N.C.

Western Europe is starting to resemble the United States from a treasury perspective, in that it encompasses a large geographic area, a lot of banks, and a single currency and interest rate. U.S. organizations have been quick to note this resemblance and apply U.S. cash-management techniques like lockboxes (called "intercept points" in Europe) to expedite collections by grabbing checks as close as possible to the point at which they enter the postal system, Allman-Ward reports. European companies, accustomed to an electronic payments culture, have been slower to catch on to this paper logic, she adds.

To expedite cash flow for their best customers, major banks are immediately making funds available -- less a discount -- when paper checks are presented, Allman-Ward reports. This is usually done on a recourse basis. This variation on factoring covers the period during which the check is being cleared rather than the period between when the invoice is issued and when payment is received.

While the euro has simplified currency management for one large region where selling in nondollar currencies is common, it has set off a pitched battle between corporate finance executives and banks in the 12 euro-zone nations over what constitutes a domestic payment when money crosses political borders, Allman-Ward reports.

"In corporate thinking, a euro is a euro. If that is the currency of the party they are paying, it's a domestic payment and should not be subject to cross-border fees. To banks, the checks still have to move from one national clearing system to another, so it's still cross-border," she explains. The banks have operational logic on their side, since the expenses are still there. But the corporates have passion. "They are outraged," she reports. Banks have not conceded the point, but in the face of pressure from the large corporations doing business in the region, they have dropped those fees to the point where they don't make much difference, she notes.

Making It Easy

As the number of potential fx customers grows, banks are scrambling to offer user-friendly solutions for businesses below Global 2000 status. For example, Citibank's WorldLink, one of the classic multicurrency payment services, now provides a multicurrency collection service as well. The collection service was introduced this year in North America, reports Karen Hung Kees, vice president and global business manager for WorldLink.

The service's users tell their customers to wire payments, in either dollars or their local currency, to a Citibank account in or near the buyer's country. The bank offers such accounts in 43 countries, representing 32 currencies, including the euro. If the payment is in a nondollar currency, the bank converts it to dollars (or whatever currency the biller requests) and transfers the funds to a designated account, which can be a concentration account in the United States, Kees explains. Billers send remittance information to the bank so it can match incoming payments with invoices.

Citibank customers receive a daily transmission containing amounts and reference numbers so they can close out the appropriate receivables, see what fx rate was applied and find out just what the proceeds of the transactions were. Despite some similarities, don't call it a lockbox. It's only for wires, and it has an embedded fx element, Kees points out. The service works particularly well when a company receives a lot of payments in a given currency but doesn't pay a lot of its own bills in that currency. In such cases, it's not economical to maintain accounts in that currency, she adds.

Another subsidiary of Citigroup, Salomon Smith Barney, which is based in New York City, uses the new WorldLink collection service to receive payments from employees who are buying their company's stock under stock-purchase benefit plans. Salomon Smith Barney administers such plans for about 1,000 companies with 3.5 million eligible employees, 500,000 of whom are located outside the United States. Employees pay for the stock purchases in their local currency, usually through payroll deductions, explains Jay Foley, Salomon Smith Barney's first vice president for international stock plan services. Money is collected in Citibank accounts around the world, then transferred in the client corporation's base currency to its treasury, which issues the stock quarterly or semiannually, he explains. Employees can initiate purchases using the Salomon Smith Barney Web site. In some cases, money actually is moved and fx transactions are initiated. In other cases, it's all done with ledger entries. Before this year, companies had to do the foreign exchange themselves, country by country, says Foley.

Such simple and powerful new tools are critical as more and more companies find it necessary to take on foreign currency risk. The momentum behind global trade growth is approaching avalanche proportions. For finance pros in many industries, the choice is simple: Learn to do business in a multicurrency world or go out of business.

Unavoidable Risk

Hedging can be neat and mathematical, but sometimes business isn't. When business logic rules, as it should, receivables can become a bit sloppy.

It makes sense, for example, for Eastman Chemical Co., Kingsport, Tenn., to sell to customers in Argentina and bill them in the decidedly shaky Argentine peso, reports Michael Watts, manager, global liquidity. Hedging is not really an option because the cost would be prohibitive. Like many forms of insurance, hedging breaks down where you need it most.

So Eastman takes currency losses in Argentina and tries to keep them as small as possible by keeping terms short -- under 30 days, when possible, Watts explains. Prices are translated from dollars into pesos at the time of the sale, so devaluation up to that point is reflected in the pricing formula. But once the sale is made in pesos and the peso invoice is generated, Eastman is exposed to any further loss of value until it actually collects, he explains.

The billing currency is purely a business decision, Watts notes. "We like to bill in dollars to avoid currency exposure, but we do what we have to [do] to be competitive." For his company, that has meant allowing a growing number of receivables in a variety of currencies. The euro has simplified currency management in Western Europe, where Eastman long sold in local currencies, but the company now has receivables in several Latin American and Asian currencies, he says. Eastman hedges its currency exposure when the net exposure is material and when hedging can be done economically, he reports.

Once Eastman receives payment, the problems are not always over. For example, if the company uses a Brazilian subsidiary to sell to and collect from a Brazilian customer in reals, getting the money out of Brazil can be tricky. "When you try to move cash out of some countries, it has to be for a specific reason, and there are tax implications," Watts says.