TT18 Managing Foreign Exchange Risk

Guide to Financial Management

Top Tips 18

Top Tips for Managing Foreign Exchange Risk

Foreign exchange issues have come to the fore recently. Here are some simple tips to help you, your donors and your grantees manage foreign currency. 

1. Understand your foreign exchange risk

Any organisation whose income and expenditures are denominated in different currencies is exposed to foreign currency risk. Assuming that foreign exchange rates will remain unchanged is a form of speculation. It is helpful to map income and expenditure in the various currencies to monitor currency flows and assess the organisation’s currency needs and risk. 

2. Limit the number of foreign exchange transactions

If your organisation receives money in US Dollars, consider putting it into a Dollar bank account to make transfers to country offices and partners that work in dollars. Likewise with Euros and other donor currencies. This will reduce the number and the cost of currency transactions. A ‘currency map’ like this one will help you determine this. 

 

3. Forward cover

Forward cover achieves certainty at a cost. The decision to agree a rate now to buy a currency at a certain point in the future depends on your contract and donor and your NGO's circumstances. The commission and rates offered vary so it is worth shopping around to find the best deal. Larger NGOs may decide to accept the risk of currency fluctuation as they may have greater opportunities to offset the gains and losses, or at least sufficient reserves to absorb losses. Smaller NGOs may be able to accept the risk of losses over time, lowering reserve levels now, anticipating that future surpluses may rebuild reserves. But beware, as some donors may require them to be used in the project.

4. Money transfers

Ensure that you regularly review the currencies in which you make transfers to overseas programmes, to ensure that they are still the most appropriate (in view of the strength/volatility with local currencies). Often transfers are made to field offices in dollars for historical reasons which are rarely reviewed.

5. Is there a problem?

Local prices might rise due to inflation, but (in a perfect foreign exchange market) the exchange rate will adjust so the hard currency needed is the same. So the donor-funded project spends the same in hard currency even if the local currency is adrift.

6. Strict internal controls

When there is a high fluctuation in exchange rates there may be an increased risk of fraud. Expenditure could be recorded at one rate while in reality another rate has been used. The difference is then pocketed. Strong internal controls need to be in place and properly enforced. 

7. Re-submit budget before signing

There can be a significant time lag between the initial submission of a proposal to a donor and a project starting. Before the contract is signed, make sure the exchange rate assumptions made in the budget proposal are still valid. Always note the date of the exchange rate on the budget.

8. Negotiate with your donor

Ask your donor to absorb the foreign exchange losses (or gains) or the cost of a forward cover contract. They should accept one of them. The forward cover contract cost should be included in the budget for the project. If the contract is silent on foreign exchange then be confident to suggest to the donor a clause regarding foreign exchange gains and losses.

9. Negotiate with your suppliers

Suppliers of large items are often happy to accept payment in any hard currency. So ask if you can buy in the currency of your donor contract.

10. Use common sense when reporting

When trying to solve some of the foreign exchange difficulties in reporting, if no rate is specified use common sense to determine what rate to use. Be consistent in your approach and disclose it fully.
 

Want to learn more?

Mango’s Training Course Keeping your donors happy builds the confidence and skills of NGO staff who are new to managing institutional donor grants to meet donors’ financial terms & conditions when implementing programmes. It includes consideration of forex issues. 

 

See our calendar of courses around the world here: www.mango.org.uk/training/opentrainingprogramme

See Mango’s Guide to Financial Management for NGOs for free advice and tools, including a section on receiving grants. See: www.mango.org.uk/guide.

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Mango helps NGOs to make more of their money by: running practical training, supporting people in finance roles, advising NGOs and donors, and publishing free tools and guides: www.mango.org.uk