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Forecasting is inherently difficult, but forecasting the non-functional currency portion of a balance sheet can be even more problematic.  While cash flow hedging results are often passed onto the businesses, this is typically not the case with balance sheet hedging. There is also little accountability throughout a company for the line items on the balance sheet, especially at the level of detail that may be needed for FX hedging. As a result, getting an accurate and useful balance sheet forecast can be very difficult. The following are common pitfalls of balance sheet forecasting:

  • A decentralized balance forecasting process which entails people around the globe attempting to forecast various entities’ balance sheets line item by line item.
  • An inconsistent balance sheet forecasting process which entails people around the globe using different forecasting methods and even different data to forecast the same numbers.
  • A lack of visibility into information that impacts the relative accuracy of forecasting balance sheet items.
  • A lack of the systems and/or data necessary to facilitate a consistent and efficient forecasting process which produces information needed to fuel an effective balance sheet hedging program.
  • Balance sheet and cash flow forecasting processes being run in silos without a well thought out coordination between the two. Forecasted cash flow exposures (revenues, expenses, etc.) which drive balance sheet changes during any given accounting period and offer data that is not properly utilized when creating a forward looking balance sheet forecast.

As challenging as it may be, putting the people, processes and technology in place help ensure that the effectiveness of hedging results can be understood in a timely manner. Analytics capabilities should also be readily available to facilitate this understanding.

Effective balance sheet forecasting matters for any company that has FX risk exposures. Ineffective balance sheet forecasting impacts a company’s bottom line. The availability of cost-effective FX risk management solutions should inspire companies of all sizes to engage the internal and external parties necessary to assess how to upgrade the effectiveness of their FX balance sheet forecasting and hedging programs.