Now, smaller companies can hedge their FX risk using the same tools employed by Fortune 500 companies, like Coca-Cola
FX Risk and Coke:
Similar to many large corporations, Coca-Cola generates a substantial portion of its revenues from international markets. According to Coca-Cola’s 2023 10-K, “In 2022, we generated $27.6 billion of our net operating revenues from operations outside the United States” (p. 58).
As exchange rates fluctuate, the value of these foreign revenues in USD can vary significantly. This constant fluctuation is referred to as “volatility,” and it can wreak havoc on a company’s revenue, profits, and expenses. For example, according to Coca-Cola’s 10-K from 2022, foreign currencies fluctuate against the US Dollar (p. 57).
While $27.6 billion in international sales is exceptional, the challenge now is, how does Coca-Cola recapture that revenue, bring it back to America (where they are headquartered), and not let foreign currency exchange rates eat into their revenue?
Additionally, Coca-Cola incurs expenses in foreign currencies that include manufacturing, marketing, and international employee salaries. Exchange rate movements can drastically influence the costs associated with these activities, too.
What many big international companies such as Coca-Cola do—together with many of the world’s largest corporations like Meta and Apple—is use various hedging strategies to mitigate the negative impact of FX movement.
Startups and FX:
So, how can your Startup—that’s doing business internationally, at the mercy of fluctuating foreign exchange rates—hedge like Coca-Cola and reduce expenses and maximize profits?
Globalization is great for many businesses—where once a company was limited to its local markets, it now has the ability to sell to and buy from foreign nations around the world. But globalization also comes with a cost. Trading across borders involves exchanging dollars for yen, euros, pesos, or whatever the customers' currency might be. And changes in currency values can, and often do, negatively impact a company's profitability.
In 2022, companies in North America alone lost over 121 billion dollars from FX fluctuations. The obstacles to hedging mean that most startups and small businesses absorb FX losses as a cost of doing business. Some even choose to limit the scope of their business to avoid losses, limiting their potential growth. But it doesn’t have to be this way.
Many startups recognize the peril of currency fluctuations. They can feel the direct impact of the wrong move in a currency on their business. A longstanding solution to foreign currency volatility is the potential of hedging FX risk. However, startups that explore hedging FX quickly discover that this solution, as well as any others, are complicated, expensive, time-consuming, and even outdated.
If a startup wants to hedge FX risk like Coca-Cola and other global giants, they would likely have to do the following:
- Increase headcount (by a lot). One person on the finance team alone can’t manage FX risk. An entire team is needed to monitor market trends, research what financial instruments fit their use case, design an FX management strategy, and more. This is a costly solution for smaller companies that simply don't have the budget for additional payroll. Plus, implementing a hedging strategy that works takes months, oftentimes years.
- Retain consultants to devise and implement a hedging program. While this doesn’t require hiring new full-time staff, this is another example of a solution that can be very costly. Additionally, consultants can take months to develop a custom FX management system before it’s ready to implement.
- Utilize the services of a bank. Large banks have the expertise and access to the necessary tools, but once again, the cost to a smaller company can be prohibitive. Many businesses decide that the returns don't justify the expense.
Without increasing headcount, and at a fraction of the cost of banks and consultants, your startup can hedge FX risk like Coca-Cola all with the power of an Ai-powered software platform.
In 2023, Pangea launched the world’s first vertically integrated FX management solution that serves every aspect of your company's global FX operations. From hedging FX risk, to strategically managing your global FX accounts, to delivering FX payments virtually anywhere in the world, you can manage your FX all from Pangea’s single platform. Pangea’s Ai puts the same powerful strategies and tools used by Coca-Cola, such as financial derivatives and hedging instruments, in the hands of your treasury and finance team—without the large overhead of a Fortune 500 treasury staff.
Here’s how you can get started:
- Talk to one of Pangea’s Advisors about your international business activity and FX exposure.
- Onboard onto Pangea Prime™.
- Begin hedging your company's foreign exchange risk through the Platform.
FX exposure doesn’t have to prevent your company from growing. Watch this short video to learn more about the power and opportunity of hedging through Pangea Prime:
Schedule a demo today to get started. Get the predictability and control you deserve in your startup.
Pangea Prime™: Predictable, simplified FX management.
Disclaimer: This is a 3rd party article that is neither endorsed or sponsored by Coca Cola. We simply like their drinks, and think they did a good job hedging in 2022, so we wanted to point that out. Good job, Coke.
