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Tech firms going global: How can finance teams best manage FX risk?

From Silicon Valley to India, it is hard to think of another industry that has benefited more from the age of globalisation than enterprise technology.

But it’s not just about the traditional hubs, London’s tech scene is also fizzing with firms well positioned for international growth. According to the Tech City Investment Organisation, the number of digital and tech companies in London grew by 76 per cent last year.

As stated in previous pieces, currency fluctuation affects a variety of businesses across different sectors. But the challenge for the tech industry, perhaps more so than others, is that as businesses expand their operations internationally, they tend to have more exposure to FX. This would be less of an issue if we lived in more benign times, but with currency markets notoriously volatile at the moment, tech firms’ bottom line could be negatively affected by any unexpected movements.

Recent swings in global currencies, such as Sterling, have heightened risk for UK tech companies working with international suppliers, production, or customers in different currencies. Take IT services providers - a standard export sector that often faces margin pressures when Dollar dominated costs rise relative to overseas currency revenues. For example, a growing firm based in London could be increasing the number of technology services it exports to the US. However, it may well generate sales in Dollars but incur costs for these sales in Sterling. In this case, the company is potentially exposed to structural risk - particularly in the event of a sudden spike in the dollar post the Fed’s latest decision to raise rates. Any situation like this can have much bigger impact on its net cash flow from its US operations.

For tech-based financial directors looking to manage these events, the question they need to ask themselves is how can they best manage their FX risk exposure? A good starting point is ensuring they have the most accurate FX rates – as any unexpected fluctuations in a currency can hit margins. In order to achieve strong rates, financial controllers should ensure they have a wide data pool so that they can keep tabs of global currency movements. On top of this, Financial controllers, or even CFOs, in the case of the bigger tech firms, should also consider an integrated data platform with the latest rate information, analytics tools, as well as continuously updated FX data feed.

Few industries move faster than technology, and no market changes more rapidly than FX. With this in mind, growth-minded tech firms can ill afford to ignore the current macroeconomic environment.

Only by having a wide data pool and automated feeds to prevent any unwelcome hits to the bottom line, can technology firms be confident of fully managing the currency exposure in line with international expansion.

Natasha Lala, Managing Director and FX expert, OANDA Solutions for Business

Image source: Shutterstock/winui