OpinionCash management in a volatile world: Practical tools for currency risk management
Opinion
Cash management in a volatile world: Practical tools for currency risk management
"The current global economic environment is highly volatile, directly affecting the operations of global companies. Currency hedging is not just a financial strategy; it is a critical tool for stabilizing business operations in times of uncertainty," writes Nir Donitza, CFO at Cynet Security.
Over the past two years, global events such as the Russia-Ukraine war, U.S.-China tensions, and the Middle East conflict have led to sharp fluctuations in the global currency markets.
To put this into perspective, in less than two years, the exchange rate of the dollar against the shekel rose from a low of 3.38 in January 2023 to a high of 4.08 in October 2023, and by October 2024, it was trading around 3.7.
The closures of many startups in 2023-2024 are largely due to a combination of business challenges in a fragile economic environment. A key issue for startups is finding product-market fit - over 55% of startups fail because their product doesn’t meet a real need. Another challenge is when to scale the business. A 2024 study by Harvard Business School found that premature scaling, or scaling before the product is developed and cash flow is stable, increases the risk of failure by 20% to 40%.
These challenges are compounded during times of economic uncertainty and currency volatility, especially for startups and growth companies that often rely on dollar-based fundraising and foreign revenue streams, with significant expenses in local currencies. In such cases, management must figure out how to preserve cash reserves and ensure enough runway before raising additional funds.
Basic Hedging Strategies for Startups
First, it’s important to understand that the goal of currency hedging is not to eliminate risk but to manage it. For early-stage startups (Seed to Series B), the focus should be on simple, flexible strategies, as founders need to prioritize product development and operations. Recommended basic strategies include:
- Locking in exchange rates by converting cash for a full operating year in line with planned budgets and currencies.
- Natural hedging: Synchronizing revenues and expenses in the same currency, for example, by aligning customer and supplier payment terms.
- Layered deposits: Using deposits for different time periods to maximize interest while maintaining liquidity. This is less effective during high inflation and low interest rates.
Advanced Hedging Strategies for Growth Stage Startups
As companies grow (typically from Series C and beyond), exposure to currency risk increases, requiring more advanced tools such as:
- Currency futures contracts: Useful when amounts and dates are predictable, and exchange rates are stable. For instance, an export company expecting payment in USD in three months may purchase a futures contract to lock in the rate and avoid currency fluctuations. For instance, SpaceX, after raising $750 million in January 2023, purchased futures contracts to hedge expected expenditures in Europe and Asia, protecting the value of the funds raised from fluctuations in the euro and Asian currencies.
- Currency options: Appropriate during periods of high volatility or when flexibility is needed. For example, a company expecting euro payments in one month may buy a put option, which allows them to sell euros at a predetermined rate if the exchange rate falls below a certain level. Apple, for example, reported using options to preserve the value of its revenues in euros and pounds against the dollar. In 2023, the company’s revenues were $383 billion, with 59% generated outside North America, primarily in foreign currencies.
It’s important to note that using advanced hedging strategies requires expertise and ongoing management of positions.
The current global economic environment is highly volatile, directly affecting the operations of global companies. Currency hedging is not just a financial strategy; it is a critical tool for stabilizing business operations in times of uncertainty. Therefore, it is important to implement processes for evaluating the impact of exchange rate fluctuations on cash flow. This is especially crucial for startups and growth companies, which rely on fundraising before achieving profitability. This doesn’t require setting up a trading desk or adopt complex strategies. There are basic strategies that can - and should - be implemented. This is like a muscle that needs to be trained and developed as the company grows.
Jim Rogers, a renowned investor in commodities and currencies, stated that the most important skill for an investor is identifying risks and hedging against them. Currency risk management is crucial for the growth strategy of global companies, and those who fail to manage it may find themselves out of the game.
Nir Donitza is the CFO at Cynet Security.
