Cut your coat to the currency

Bharat Kumar

THIS wasn't the first time a user of technology was flummoxed when eWorld asked him about the returns on investment in a piece of software. But, for a change, it wasn't because there were no returns, or because it was difficult to measure them. Arup Barua, General Manager, Treasury, at Madura Coats Ltd, had but one answer: ''We cannot do without the software now.'' Well, that response was a first for eWorld.

We spent some time with Barua to understand the importance of a treasury department in a company and how technology deployed by that department can help increase cost savings in the company. Barua chose DiffEye, a foreign exchange management software from Bangalore-based DiffSoft.

Here's why the vagaries of foreign exchange rates make it mandatory for companies to manage their ''exposures.''

Say a company has an export order. The order is placed on, say, December 1, 2001 and the material is to be shipped on January 25, 2002. If the rupee-dollar rate on the date of the order is Rs 49 and rises to Rs 46 on the date of shipping, the company loses Rs 3 per dollar. If the size of the order is, say, $500,000, the company loses a whopping Rs 15 lakh merely due to exchange rate fluctuation. Similarly, it could gain if the rupee plummets for an export order. Converse rules hold in an import transaction.

To prevent losses, companies typically enter a forward contract with banks. In this, a company covers its exposure against rate fluctuations. In the above scenario if the company had such a contract, then the bank would assure payment of an amount in line with the Rs 49 to a dollar rate on January 25, 2002.

In doing this, Barua says he needs monthly reports on how various divisions in the company perform with respect to dollar exposures.

He says, ''All our trade operates through divisions. The head office (HO) gets monthly information on exposures from all divisions. The divisions are in touch directly with customers for export or import orders. By the time the information reaches HO, it gets translated to cash flows and that is what we see on our screens here.''

A different approach

Typically, a company would look at every transaction, and attempt to profit from each. In the case of Madura Coats, Barua says that the objective is to cover exposure and make sure that there is as little loss as possible. Profit is not the focus. He says, ''We hedge our exposures based on cash flows.''

Coats has three major divisions and cash flows have to be integrated, currency-wise and division-wise and based on whether they are receivables or payables. Earlier, the company used to hedge individually for every cash flow. Explains Barua, ''Our policy was to hedge all imports and exports. The minute you identify a cost, you fix it, was our outlook.''

The reason for this, Barua says, was that each division was treated as a different profit centre and forex gains and losses details for each were required.

''You can well imagine that transactions of these three divisions on a simple spreadsheet application for one month is difficult enough. To do it for 12 months was unspeakable.''

What did the software do?

DiffEye brought along the ability to know the status of each transaction of each division when required. Further, it brought about integrity of database. The treasury department in Coats breaks every transaction into cash-flows.

The head office hence gets an overall idea of the exposure that the company has. On a monthly basis, every division communicates with the Head Office as to what its dollar receipts, euro receipts, yen payables and dollar payables and the like are. This is phased for the next twelve months.

The Head Office puts these together and negotiates with the bank for a forward contract.

The dangers of a simple software

Barua hits the nail on the head when he says, ''To do anything with information, you need accurate information in the first place. This data is dynamic. I could have a $2-million import exposure and a $3-million exposure on receipts. This is changing every month and you have to do it for 12 months. If you have a mere spreadsheet application, it's very difficult to work with. After some time, you could forget a few details that need to go in.''

Very often, an export order could get shifted. If it was to be shipped in October and the receipts expected in January, these deadlines could be postponed by a month each because, the factory can't make it on time or the customer wants it postponed. ''All this requires manipulation of exposures. You need a software package which will give you an integrated database. In a simple spreadsheet, you might wipe out the entire file by mistake.''

Change of policy

The software helped change the forex policy within the company. Says Barua, ''We used to cover both imports and exports earlier. Now we cover only the difference. We could have decided on this even without the software. But it would have taken us a really long time and investments in several more people to arrive at the conclusion. Today, we have only two people on the job here. It was because the software gave us a year-old processed data that we could take this decision. We saw a cost in hedging every deal and realised that we could save if we hedged only the difference.''

Returns on investment

When pushed to give an RoI figure, Barua says, ''The last year, the company's exports are about $50 million and imports are worth $25 million. On the change of policy, we would have saved Rs 10 lakh annually on our bank margins alone - with margins at 2 paise per dollar.''

But what changed the policy itself was not entirely due to the software. It took its time coming, but when it needed to be done, Barua says, ''We would not have done it without the software. The resources would have been too demanding for such a task without the software.''

Clarity of action

Clearly, the software made decision-making easier. Barua says, ''When money comes in or goes out, it used to be at a particular rate. That goes into the profit and loss and mixes with other information such as trading profits, exchange profits, insurance costs, etc. Today we are able to monitor that, and see if exchange variations have been covered.''

Further, the HO had to attribute gains or losses to individual divisions. If exposures for division A, B and C were $200,000, $100,000 and $200,000, the HO would enter a single contract with the bank for half a million dollars. ''If there are changes in orders, postponements etc, I will need to attribute those to each division accordingly. The software helps me do it''.

bharatk@thehindu.co.in

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