4 Finance Team Best Practices for Managing Multi-Currency Cash Flow By Jonah Balfour It seems like every day the world gets smaller. Businesses and finance teams now face a truly global world and the challenge of doing business in diverse countries and regions around the world. Technology, and the rise of the distributed workforce, has only accelerated this process. In this environment, it’s important for businesses and especially finance teams to be able to manage cash flow in multiple currencies for all the markets and countries where they operate Many businesses have entities abroad, which require compliance with local regulations and tax laws. At any rate, tracking and recording the cash flow to and from multiple countries in multiple currencies presents a specific set of reporting requirements for your team. Challenges Managing foreign currency cash flow brings a number of challenges and there are several common mistakes that companies make when dealing with the process. First and foremost is the challenge of consolidation during the monthly close. Finance teams will need to consolidate spending and other expenses made in multiple currencies across the business and convert to its functional currency in its home market. Modern accounting platforms have helped to automate this process but there are still manual tasks that demand time and effort and some businesses are still doing this process manually. Inflation is also a confounding factor if a foreign subsidiary is operating in a country in a highly inflationary environment. We’re seeing the ramifications of this in the current environment with a number of countries currently experiencing periods of rapid inflation, and if finance teams aren’t careful this can lead to exchange loss. An additional challenge is properly modeling cash flow from across multiple entities. This is compounded if those entities are using different ERPs or other platforms, spreading the data across multiple formats. It’s a demanding process, but the right mindset can help finance teams deal with the process. So, with those challenges in mind, we collected four best practices to help your finance team manage multi-currency cash flow. Build a FX Strategy First and foremost, it’s important to build a foreign exchange (FX) strategy that accounts for all of the needs of your business and its specific requirements. It can start with a number of questions as you look at your company’s basic financial health, and then factor in the challenges and risks that are specific to managing foreign currency. It’s also critical to make sure you have clear visibility into your expenses and spending across global subsidiaries. It’s also important to study the impact that FX fluctuations will have on your P&L and to prepare your business accordingly. Into 2024, this is likely to remain a top priority with the volatile FX and inflationary environment in many places around the world. So be prepared to build a hedging strategy depending on the markets you’re operating in and the volatility of their currency. Your strategy needs to find a balance and help optimize your finance team’s efforts, making sure that foreign currency inflows and outflows are accurately recorded, and are in compliance with the disparate regulations you may face. Develop a Robust Foreign Currency Cash Forecast Forecasting cash flow is critical for any finance team. Foreign currency cash forecasts bring several new challenges and wrinkles as currencies fluctuate, compounding the challenge of building an accurate forecast. First, it’s important to determine whether you will pursue a direct or indirect method of measuring your cash flow. A direct method, with a description of where the cash was spent, or an indirect method, where you start with your net loss/net profit and then make adjustments per period. It’s recommended to choose the direct method as this will provide you with greater visibility and control over cash management. It may be more difficult and present additional challenges, but it can also provide greater visibility into spending and expenses. Understanding where money is being spent, both geographically speaking and on which products and services your business is paying for, can provide the relevant foundation for a more accurate forecast. Automate Whenever Possible Finance automation is becoming increasingly important as new online platforms emerge to help finance teams. Automation can be particularly helpful in regards to managing foreign cash flow as it can assist finance teams in calculating exchange rates and accurately tracking spending by geography or foreign subsidiaries. Additionally, embracing finance automation will help manage your spend better, saving time on manual work, and enabling more richness of data, and more detail for each event. This is one area where a spend management platform like Mesh is especially helpful. It not only provides powerful automation tools but can also be used to bring all spending from multiple entities into one platform. Automating key elements of your finance tech stack is also helpful in increasing visibility across your company’s finances. This will help you develop a more robust cash forecast, as previously mentioned. Build a Robust Model When dealing with multi-currency cash flow, it’s also important to focus on building a robust and reliable model of your data. Clear and correct data that provides a complete and accurate picture of cash flow is critical to drawing the proper conclusions for your business. To support this, it’s important to identify your different data sources and make sure they are complete and accurate. In the event where the data is incomplete you’ll most likely face reconciliation issues. This is another area where Mesh can help, as it’s able to deliver clean data that you can easily incorporate into your model. Final Thoughts Managing multiple currencies has become a core task for most finance teams and requires a special focus on accurately tracking and recording spending from multiple locations and subsidiaries. These best practices can help your team manage the challenges presented by multi-currency cash flow, and keep your team focused on your business’s challenges. Find out more about Mesh, its support for global finance teams, and the ways it can help your business implement some of these best practices. FAQs What challenges do companies face in managing foreign currency cash flow? Challenges include consolidating spending from multiple currencies during monthly close, dealing with inflation in foreign subsidiaries, and modeling cash flow from different entities using various ERPs or platforms. How can finance teams overcome consolidation challenges during the monthly close? Modern accounting platforms automate some consolidation tasks, but manual efforts persist. Companies can centralize data using multi-entity accounting and spend management software for efficiency. What impact does inflation have on foreign currency cash flow? Operating in highly inflationary foreign markets can lead to exchange losses, requiring careful risk management. How can finance teams improve cash flow forecasting in foreign currencies? By choosing a direct method for measuring cash flow and understanding spending patterns by geography and products/services, finance teams can enhance forecast accuracy. How does automation help manage foreign currency cash flow? Finance automation calculates exchange rates, tracks spending in different locations, and reduces manual workload. Platforms like Mesh consolidate spending from multiple entities. Why is building a robust data model important for multi-currency cash flow? A clear and accurate data model is crucial for sound cash flow analysis, avoiding reconciliation issues. Identifying and ensuring data completeness from various sources is essential. What is the significance of developing a foreign exchange (FX) strategy for global cash flow management? Building an FX strategy addresses currency-specific challenges, accounting for FX fluctuations’ impact on the P&L, and incorporating hedging strategies for volatile markets. How do finance teams benefit from automation and using platforms like Mesh? Automation and spend management platforms enable precise spending tracking, efficient cash flow management, increased visibility, and enhanced decision-making and forecasting. Get the latest blogs from Mesh by subscribing to our newsletter Manage Your Payments With Full Control & Visibility Get Started Jonah Balfour Jonah Balfour is a Content Manager at Mesh Payments. He has experience creating content for multiple tech companies, and previous experience managing PR campaigns for emerging startups. Originally from Los Angeles, Jonah chose to leave the ample sunshine of Southern California to study at the University of Wisconsin. He is an avid fan of both Star Wars and Star Trek, and spends most of his time chasing after his two young daughters.