Strategies for smoothing the highs and lows of currency volatility exposure

I’ve been fascinated recently with “currency wars” and the ways national governments are adapting. For instance, the United Kingdom and China are entering their own currency-swap deals, and Brazil, Russia, India, China and South Africa (aka BRICS) have recently agreed to set up their own $100 billion monetary reserve and are reportedly dumping their euro reserves.

Closer to home, currency fluctuations hit U.S.-based multinational corporations in 2012 to the tune of a collective negative impact of $22.7 billion in the third quarter alone. The trend continues in 2013, and currency volatility has for the first time grabbed the attention of management at the highest levels in companies. In this volatile environment, the treasurer is working more closely than ever with the CEO, the CFO, the board and the head of M&A on associated risk management.

But how are companies adapting? For one, tech giant Hewlett-Packard, which has approximately 65 percent of its sales outside the United States, addresses the possibility of countries exiting the euro in its risk disclosures. Companies are increasingly trying to understand the potential implications of currency volatility and how to plan for them; the best advice bankers seem to be able to give is to get the paperwork in order and narrow the number of jurisdictions that hedge contracts are subject to. Restricting business to counter-party banks in a single jurisdiction is a smart move, because at least the terms would be consistent.

When, and if, exposure is clearly quantified, identifying the need for direct risk-mitigation strategies that can be controlled and reduced by operational strategies can best be accomplished by answering the following questions: Where are balances kept and in what currencies? Do FX exposures match the respective trading risks? What is the relationship between subsidiaries and the global parent? Are they financed by loans or equity?

JP Morgan, in the recent article “Managing FX Risk: The Challenge of Global Payments,” says the key is to centralize what is appropriate. In many instances, treasury activity is with business units. It is possible to leave the payments with these units (they are most in touch with vendors and suppliers), but centralize everything else. (Fortunately, several global banks now offer easy-to-use technology that allows multinationals to see their FX exposures without the cost of standardizing all their ERP systems or even requiring the systems to be on the same version.)

According to a recent Wells Fargo Foreign Exchange Risk Management Practices Survey of U.S.-based multinationals, companies are using three risk management approaches:

Systematic risk management: hedging a fixed amount of forecasted foreign currency transactions over a specific time period at regular intervals using specific hedge instruments (55 percent of survey respondents)

Active hedging: discretionary hedging of forecasted foreign currency transactions based on market conditions that allows for extending the hedge horizon, changing targeted percentage amounts or using discretion in the hedge instrument (36 percent)

Dynamic hedging: using discretion not only when initiating hedges, but also during the life of hedges (9 percent)

Given the rapidly changing environment, it’s imperative that a multinational’s particular strategy be revisited at least quarterly and openly discussed with the board.

Perhaps countries will one day figure out how to calm currency volatility, and currency wars will be a thing of the past. This month, the Bitcoin 2013 conference in San Jose drew more than 1,000 enthusiasts, developers, entrepreneurs, VCs and lawyers. (I still don’t understand how this decentralized, open-source peer-to-peer digital currency works, but I’ll keep trying.) And at the G8 Summit in July 2009, then-president of Russia Dmitry Medvedev presented a newly minted “test coin” representing a “united future world currency.” Mere mention of this in my circles creates very spirited debate between those who believe we’re eventually heading for a single global currency and those who believe entertaining such an idea is simply conspiracy theory.

One thing is for certain, the monetary policies of the mature and emerging markets will continue to keep the senior leadership of multinational companies on their toes.

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Breakfast seminar: Will your IPO or M&A be everything it could be?

RoseRyan is presenting a free breakfast seminar, “Optimizing Your Liquidity Event: Practical Advice From the Trenches,” on June 12 in Palo Alto.

It will show you how to maximize the profitability—and minimize the pain—of your future IPO or M&A, setting the stage for success by methodically dealing with legal, finance and accounting issues and policies. Topics include:

  • Managing processes and policies
  • Avoiding the primary deal killers
  • Preparing financial accounting and reporting

You’ll also get an unvarnished account of the NeoPhotonics IPO from the company’s vice president and CFO, James D. Fay. He’ll share what worked, what didn’t and what the company learned from the experience.

Our panel also includes these IPO and M&A experts:

Pat Voll, Vice President, RoseRyan: Pat leads RoseRyan’s compliance and ERM practice and has worked on numerous IPOs and M&As.

Yoomin Hong, Vice President, Goldman, Sachs & Co.: Yoomin focuses on origination and execution of strategic and financing transactions for clients in the cleantech sector.

E. Thom (Todd) Rumberger Jr., Partner, Foley & Lardner LLP: Todd focuses on private equity, M&As and venture capital, and guiding Internet, software, telecommunications, digital media and financial services companies through all stages of their growth.

The seminar takes place 8–10 a.m. at Foley & Lardner in Palo Alto. Get details and register here. 

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Real-time data driving businesses—and changing the CFO role

It wasn’t long ago that real-time financial information was available only to those who worked in companies with expensive data collection and analysis systems. CFOs of less-wealthy companies had to make decisions on the basis of historical information (or hunches, never a good idea). Lacking timely information, they had to forgo decisions that could have increased revenues, improved inventory management or otherwise helped their companies, because in the absence of good information, certain decisions were just too risky. The default was to make no decision, and that’s what most CFOs rightly did—but at a cost to their business.

Today, real-time information is inexpensive to obtain, and the role of CFOs has changed as a result. Having access to real-time information allows CFOs to make appropriate business decisions without the risk that used to exist. Many CFOs are taking advantage of that fact—and nowhere more than in Silicon Valley, where many businesses are driven by real-time data.

I’ve become part of that trend as a consulting CFO for some of the Valley’s up-and-comers. One of them is a social media company with data gathering systems that detail sales volumes and revenues every 10 minutes, 24 hours a day, 7 days a week. The company’s accounting systems allow the executive team to see the financial status of the company in real time, at all times. As CFO, I can access this information from anywhere around the world and help the company make appropriate decisions that will immediately affect its business. For example, if we see revenues dropping, we can instantaneously initiate a promotion, sale or other activity that will drive revenues back to the target, at which time we can instantaneously cease the activity. We can see the drop and recovery all in real time and keep sales on track with the overall business plan.

What I am doing with this company is now the norm in Silicon Valley. We can expect to see more and more CFOs of businesses outside the Valley follow the same path.

The growing availability of real-time data is forcing a shift in the role of the financial executive. Today’s CFOs need to understand where to get the data, how to interpret it and how to use such real-time information to drive a business forward. If they don’t, they risk becoming a statistic themselves.

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RoseRyan in action: keeping an acquisition on track

When your company is growing and changing fast, fine-tuning financials can sometimes take a backseat to managing the business. But think about this: subpar accounting for rev rec, inventory, equity or other areas can affect overall business health and even derail efforts to position your company for a major transition.

Helping businesses with these challenges to keep M&As and other objectives within reach is second nature to us. Check out our latest project profile to see how we helped a high tech acquisition target reconcile long-neglected accounting in record time to keep the deal on track. We also ensured a smooth post-acquisition integration.

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What do a post-earthquake rescue and a RoseRyan gig have in common?

Recently I was thinking about an event my son participated in called the Tech Challenge, a design competition hosted by the Tech Museum of Innovation in San Jose. The children were a part of a team that had to meet the challenge of rescuing someone from a bridge broken during an earthquake. It’s a fabulous event, and the atmosphere reminds me of a room full of entrepreneurs and inventors bursting at the seams displaying their ideas and products.

My role: provide pizza and soft drinks and a place to for the kids to work. (Aha….I think I can manage that!) In many ways what we did to facilitate our children’s team activity was similar in spirit to how we at RoseRyan help our clients.

We may provide a specific skill, like project management or budget and planning analysis, that the client team lacks. We give expert advice, as I have done helping a client translate needs into requirements for a systems implementation. We might simply help get the day-to-day job done. Or we might mediate a situation where there are opposing views, helping people understand the options. Oftentimes the most important thing we do is get the right people in the room to speak to one another, listen and make decisions—together, we figure out how to proceed. (Just like my son’s team did, using the tools that included a net and a Nerf gun.)

When all is said and done, we don’t work with our clients so that we are successful, we work so that our clients are successful. Their success is our greatest reward. We build relationships and even friendships with fabulous people who care about their business and are striving to do things better and smarter.

In the end, my son’s team rescued the bridge survivor with one perfect shot from a Nerf gun and a fabulous net catch. Did they live up to the spirit of the challenge? I answer with a resounding yes!

RoseRyan really does have this team spirit too—we go beyond the numbers and become a part of our clients’ team to meet their challenges together.

To get a taste of how we work with our clients, check out some of our project profiles.

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Sizing up the impacts of NASDAQ’s attempt to close the SOX loophole created by the JOBS Act

NASDAQ recently filed a proposed rule change with the SEC that’s seemingly aimed at SOX compliance. If implemented, each NASDAQ-listed company will be required to establish and maintain an internal audit function “to provide management and the audit committee with ongoing assessments of the Company’s risk management processes and system of internal control.” Companies listed as of June 30, 2013, will be required to establish an internal audit function by December 31, 2013; companies listed after June 30, 2013, will be required to establish that function prior to listing. In NASDAQ’s view, the proposed rule change will place no unnecessary or inappropriate burden on competition.

To me, this proposed rule change signals that the NASDAQ is weighing in on the JOBS Act provision that exempts certain companies from SOX 404(b), an auditor attestation regarding internal controls that was intended to foster growth by lowering administrative burdens on emerging growth companies (those with revenues less than $1 billion) entering the public market. These companies were granted as many as five years’ relief from a number of rules, including independent auditor attestation on the design and effectiveness of internal controls over financial reporting.

The more than 30 comments posted by the recent close of the SEC comment period were primarily from CFOs of small NASDAQ-listed companies, who said the proposed rule was costly for their enterprises and duplicative of existing SOX requirements. Some comments reflected concern that the rule reduced audit committees’ flexibility to direct the focus of the internal audit function.

Here’s my take: the proposed rule change was not intended to force companies to go beyond what is currently considered best practice—and what most companies do in support of SOX 404(b). (In general, companies that comply with 404(b) have a much more robust set of internal controls and are more diligent in consistently adhering to them—and therefore have greater financial statement integrity—than companies complying only with 404(a).) Although the proposed rule specifically excludes companies’ external audit firms from providing internal audit services, it does allow outsourcing to a third party.

The NASDAQ’s attempt to close the SOX loophole should not significantly affect RoseRyan’s SOX clients. These companies typically engage us to help them ensure that their internal controls are appropriately designed, to independently test the controls’ effectiveness and to periodically meet with their audit committees. I don’t see the proposed rule greatly changing that scope of work. However, the rule will add to the workload of many newly public companies currently exempt from 404(b). I view that change as a step in the right direction for investor protection and for leveling the playing field for companies traded on the NASDAQ, regardless of when they went public.

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Life Sciences Roundtable tackles challenges along product development-to-launch trajectory

RoseRyan has been supporting clients in the life sciences industry for nearly two decades. In addition to providing assistance on many aspects of accounting, we host a Life Sciences Roundtable twice a year. The event brings together a small group of finance execs to discuss best practices and get input on challenges their life sciences companies are facing. The March 2013 roundtable focused on some of the challenges of moving from product development to product launch:

  • Pricing strategy: Some interesting discussion highlighted the challenges of entering a new market and how they differ from the challenges of competing in an established market. That discussion extended to the role of insurance coverage and government reimbursement programs (Medicare, for example) in pricing.
  • Manufacturing: Discussion about the decision to outsource manufacturing or do it in-house touched on the complexity of the manufacturing process and drug formulation and on anticipated production volume. A complex manufacturing process may be best handled in-house to ensure quality control. On the other hand, low production volumes and resulting idle capacity in your production facility may make in-house manufacturing costly.
  • Sales forecasting: This task is a high-stakes game in life sciences. The worst possible scenario is running short on inventory and having patients unable to refill their prescriptions. But the flip side—having too much inventory—can also kill your bottom line if your product expires before you can sell it.
  • Fundraising: No gathering of life sciences finance execs would be complete without a discussion about fundraising—and this one was far ranging. Among the topics were the availability of funds, the cost of capital and dilution to existing shareholders. Participants also considered the pros and cons of when to raise funds—that is, attempt at the outset to raise the full amount needed to fund all clinical trial phases, or only the amount needed to get to the next milestone. They also described some of the types of financings their companies had obtained.

RoseRyan is pleased to provide a forum for our clients in the life sciences industry to discuss issues and share ideas with their peers. We look forward to hosting the next roundtable in the fall.

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Perks nice, but focus on corporate culture to attract talent and improve your bottom line

What makes a company succeed? High on the list is corporate culture, a newly hot topic since Yahoo! CEO Marissa Mayer announced her controversial decision to abolish the Internet giant’s work-from-home policy with the intent to spur collaboration and innovation and, ultimately, increase profits. Mayer’s move runs counter to the culture of many companies such as Cisco, Hewlett-Packard and American Express, which embrace telecommuting as a tool for increasing productivity and morale as well as attracting and retaining talent. No matter where you land on the telecommuting debate, the larger point, I would argue, is that corporate success hinges on creating and consistently communicating your corporate culture.

Attracting and retaining great employees who will boost your bottom line has a lot less to do with ping pong tables and free snacks or sky-high salaries than with corporate culture. I’m talking about articulating your company’s core values, defining the employee behaviors that align with them and ensuring that managers support and recognize these behaviors.

In a Q&A for the Build Network, RoseRyan CEO Kathy Ryan discusses how to draw—and keep—top talent by embedding your core values in every facet of your organization. At RoseRyan, she created a team of values champions responsible for reflecting and integrating our company’s values into hiring practices, work performance, colleague relationships and recognition, just to name a few areas. The result? RoseRyan has successfully recruited and retained highly qualified individuals in one of the most competitive marketplaces for finance professionals in Silicon Valley.

Two of RoseRyan’s values have been critical to my success as a dream team member: professional growth (what we refer to as “Excel,” or “Stretch, Grow and Innovate”) and trustworthy and honest communication. The former signals that management supports me when I try new things and challenge myself in my role. The latter assures me that I’m informed because the dealings of my colleagues and company are transparent. Out with office politics and hidden agendas.

You don’t have to look far to find examples of companies where corporate culture is a draw for employees and a large factor in corporate success. Take San Francisco-based eco-friendly cleaning products maker Method Products. In their book, The Method Method, the two co-founders describe how they struggled to hire top talent. To differentiate itself, the company created an offbeat corporate culture that dictates that every job candidate be asked this question: how will you help keep Method weird? Having created its weirdness value, Method identified the behaviors it would support: feedback, transparency, creativity and caring. The Method method clearly works: the 2000 startup is now a $100 million giant that competes with Fortune 500 companies.

Here’s the take away: creating a corporate culture—articulating values and identifying prized behaviors—is an investment in your organization’s future. A well-defined and deeply embedded corporate culture tells employees what to expect and how to succeed in your organization. Set the expectation, and you’ll likely get a happier, more productive work environment that boosts your bottom line.

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Sales tax: the growing headache

On September 1, 2012, the state of California started to collect sales tax from Amazon after a years-long argument over whether the Internet company should pay such a tax. In just the first four months of collection that tax amounted to $96.4 million. A good deal? Maybe, but you could argue that this apparent win for California was not so good, as the state agreed not to pursue Amazon for back taxes, penalties and interest that it may have been owed—a potentially huge sum given the number of years Amazon has been in business. 

California is pursuing other out-of-state Internet business companies for sales tax on business performed in the state. It is not alone. Many states are realizing that out-of-state Internet companies with in-state sales are a huge potential source of income to themselves if they can somehow establish that the companies have a business presence, or nexus, in them. 

The Internet businesses potentially affected include not only those selling tangible goods, like Amazon, but others that sell or license products such as software and social gaming—products that did not exist when states first established their sales tax rules. Not surprisingly, states are rushing through legislation to pursue these new forms of revenue. Unfortunately, this means that sales tax rules will vary from state to state, making compliance a nightmare.

The rules for determining nexus in each state can be complex and subtle and can involve relationships that you wouldn’t think would affect tax status but in fact do. Take a California-based Internet company that sells to New York-based consumers. If it advertises in New York via a fixed-fee advertising agreement with a New York-based company, it probably has not created nexus in New York under that state’s nexus rules. However, if the fee is found to be commission based, even in the remotest way, the company probably has created nexus, as the arrangement amounts to a reward-based referral. What seems like a minor variation in the terms of an advertising agreement can have very large tax liability consequences. 

The size of the deal is irrelevant for determining nexus. Once you have nexus, you pay sales tax on all your sales to consumers in the state, not just those sales generated from the agreement. So the price of bad tax planning can be high.

Some sales tax rules remain straightforward. For example, if your company employs someone resident in another state—someone who assists in any way with the company’s sales process or sales cycle—you have nexus in that state. But with new sales-tax rulemaking afoot across the land, you will need to consider many other factors to determine your liability. 

Internet businesses have choices. Good tax planning will pay off, but it’s not cheap. Some businesses pay third-party organizations to help them comply with ever-changing state tax rules. Unfortunately, many businesses choose to ignore the rules altogether and hope they don’t get caught. That’s not a smart choice, because when they are caught, the back taxes, penalties and interest will be considerable. 

Not everyone can get the past eradicated like Amazon did. 

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For our two new directors, anticipating client needs is all in a day’s work

Keeping pace with our clients’ needs is our number one priority. So we’re pleased to announce that our two new directors are working behind the scenes to ensure your consultant and service requirements are met.

Stephen Ambler now manages the team that matches RoseRyan gurus to you—and helps our dream team stay current with our evolving product offerings. He acquired his wide-ranging expertise, including financial and operational management, fundraising, SEC reporting and budgeting and planning, through 30-plus years of accounting and business experience on both sides of the Atlantic—13 as CFO of Nasdaq-listed companies.

Kelley Wall adds creating new-product strategy to her current role of leading the Technical Accounting Group. Her efforts to provide services that offer practical business solutions are aided by her knowledge of the operational challenges that changes in the technical accounting and reporting landscape pose to our clients. She’s held senior management roles in areas such as SEC reporting, technical accounting, financial planning and analysis, stock administration, internal controls, worldwide consolidations, mergers and acquisitions and investor relations.

Check out the press releases to get more intell on these new moves.

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