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How to build an FX budget rate

24 October 2024

The benefits of prudent financial planning for businesses with an international footprint are compelling: clarifies and prioritises financial goals, informs decision-making, improves cash flow management, mitigates financial uncertainties, and helps to evaluate performance. Empowered by a comprehensive financial plan that ticks all these boxes they can build a modern, transparent business – but where do they start?

Financial planning for businesses operating across borders has an added layer of complexity: exposure to fluctuating exchange rates and the material impact of these market movements on their financial performance. To manage this inherent risk with certainty, businesses with an international reach should set an FX budget rate for each currency pair they transact in. This benchmark will form the basis of their financial plan, underpinning everything from budgeting to performance analysis.

What is an FX budget rate?

An FX budget rate is an internal reference exchange rate set by a business with international cash flows that’s applied to all foreign exchange transactions they undertake – with hedging strategies often executed to protect this rate.

The rate is used to convert projected non-GBP (or the accounting currency of an organisation) denominated revenues and expenses. These predetermined rates for currency conversions help businesses set realistic financial targets and manage FX risks by providing a stable reference point for budgeting purposes amid market movements.

Monitoring your FX budget rate

Some suppliers fix their prices at the start of the year meaning costs will remain static regardless of exchange rate fluctuations. Others might adjust prices monthly, allowing market movements to be more easily absorbed. Conversely, for exporters, the ability to alter prices is typically determined by a customer’s willingness to accept the impact of FX.

Consistently tracking deviations between budgeted and actual exchange rates allows for proactive adjustments and optimisations, ensuring that the business can meet its financial objectives while managing margins effectively. This proactive approach to FX budgeting both enhances financial visibility and empowers businesses to make informed decisions, such as pricing, in a dynamic global marketplace.

Protect your business

Without a budget rate, your business will surrender the ability to predict costs accurately, potentially leading to uncompetitive pricing and unexpected losses. At Lumon, we understand that an obtainable and stable FX budget rate forms the foundations of a robust financial plan.

Our team of seasoned corporate dealers will work in partnership with you to build a budget rate using tailored strategies and instruments that mitigate FX risk, support accurate cash flow forecasts, and inform commercial decisions – so you can protect your profits and plan for the year ahead with confidence.