FOREX OR NOT FOREX THAT IS THE QUESTION?

Sage is a global company for software and software service, they have 6.3 million companies and organizations using its software and services. And 70% of its profits were earned from outside of UK, the business involves working with 24 countries and they have subsidiary companies in those countries. So we can imagine the currency exchange rates could mean a lot to them. And I start wondering how are they going to be dealing with this multinational currency exchange? Whether they can make money out of it or loose it that's all going to affect their share value in the end.

   

From the 2010 financial report I have seen that they use a number of methods to help with this problem. They used a multi-currency revolving credit facility that matures in 2015 to replace an earlier facility that they cancelled, no doubt they calculated that the new facility would save them money. They also have long-term borrowings, short-term borrowings, short-term bank deposits and cash at bank and in hand.

According to Arnold there are risks such as Transaction, Translation and Economic. The Transaction risk happens when you might receive payment from a foreign country using their own currency that you will have to exchange to sterling. The agreed selling price may not be equal to the received price after the foreign exchange transaction – you might gain or you might loose. In fact Sage translation difference gained £140.6m in 2009 but only £10.5m in 2010 according to their 2010 financial report. The Translation risk happens when the company needs to express the foreign currency into, say, sterling so it can be included in the financial report. But although the foreign currency may have a 'good' figure in its own country after converting into sterling it is subject to the spot price on the day which may give a false impression on the balance sheet. This could then cause an Economic risk to the company which could affect the share value. It may be that Sage uses multilateral netting or Matching to reduce the cost of exchanging currency. Multilateral Netting is where subsidiaries settle intra-organisational currency debts for the net amount owed In a currency rather than the gross amount. Organisations, such as Sage, who have a matrix of currency liabilities between numerous subsidiaries in different parts of the world need a central treasury so that there is full knowledge at any particular time of the overall exposure of the firm and its component part.

They have certainly used cash flow hedging by borrowing in the money markets. This means they can get the money to cover their exports until they receive the payment from the importer to pay back the borrowed money. This improves their flexibility and helps to insulate their economic risk.

Even in these uncertain times I think Sage is doing well and their financial advisers must be doing their job well also to ensure the financial efficiency of the firm.

Sources: Sage Annual Report, FAME, Arnold, G.