It used to take many hours and the manual effort of multiple people to produce a foreign exchange (FX) variance analysis at Brocade, but thanks to a new procedure and reporting software implemented and run this year it now only takes just 20 minutes to produce a variance analysis for the Financial Planning & Analysis (FP&A) team and the boardroom. This case study will explain how the corporation achieved this feat.
Like many other finance teams, the Brocade treasury was lacking a proper FX variance analysis for our FX cash flows and the related hedging programme. This was hindering our ability to fully understand and analyse the FX impact to our business so we decided to take action last year and identified two key areas we needed to improve upon:
- Previously, there was no control around setting FX plan rates – this needed to change. FP&A issued their own annual FX plan rates without input from treasury. We in the treasury department hedged our cash flow quarterly on a rolling basis, instead of aligning our hedges to the planning cycle. The FX plan rates and FX hedge rates were never aligned therefore, making it difficult to explain variances.
- In the past, there was no robust FX analysis from FP&A or from treasury due to the lack of a benchmark FX plan rates document. One needed to be created and a process for creating quick variance reports established.
The key objective of the project was to align the FX hedging and planning processes at Brocade so as to have better control over the hedging and planning cycle, improve visibility around true hedge FX impacts to cash flows, and establish a benchmark to analyse the firm’s hedge results.
Treasury also wanted to have the ability to show a robust hedge effectiveness analysis to the FX risk management committee. In turn, our executives wouldn’t need to worry about the FX impact to the income statement, and would have an assurance that we were doing the right thing in treasury to mitigate any FX risk and any adverse impact on earnings.
Project Planning and the New Process
The treasury at Brocade identified two key steps that they would have to follow in order to overhaul its old way of working in regard to FX and to successfully introduce a new FX variance analysis report. The two key steps to implementation were:
- Treasury started setting FX plan rates and introduced benchmark FX rates – A principal for FX plan rates is now in place: only treasury can set annual FX plan rates for the whole FP&A group. During each planning cycle, treasury publishes FX rates for the FP&A group for their annual plan worldwide. Treasury also lock-in the cash flow hedges for the planned FX operating expenses at the same time. Therefore, the hedge rates resemble the plan rates. The hedge rates / plan rates became our benchmark rates. Throughout the year, we track the FX cash flows on both actual and ‘constant dollar’ basis: that is to say we translate FX cash flows to US dollars (USD) using the plan rates, and calculate the variances between actual and ‘constant dollar’ amounts. By using this benchmark, we can now do like-for-like comparisons between FX variances of cash flow hedges and that of FX cash flows.
- With the FX variance analysis on a constant dollar basis, Brocade treasury can now develop reports to share with FP&A the estimated and actual FX variances, once before and once after quarter end reports. We provide side-by-side comparison of the FX variances from FX operating expenses and our hedges, and show the net impact to the company as a whole. Not only does this help the corporate FP&A team gain visibility to the true FX impact reported from the region, it also helps the treasury to provide simple and clear FX impact analysis reports to senior management during the close review and to more easily update the regular FX risk committee meeting.
How FX Has Changed and How It Now Works
Due to the large number of transactions involved in Brocade’s everyday global operations, it took a lot effort to run FX variance analysis manually under the old procedure. In order to simplify the variance reporting process, treasury and FP&A worked together with IT staff to load plan rates into a Hyperion planning system, which converts all FX transactions under the new system, using the plan rates automatically.
The new procedure and supporting Hyperion technology has enabled the Brocade treasury, and also regional controllers contributing to the FP&A function, to track the corporate’s FX variances on operating expenses in foreign subsidiaries. It allows users to run a report by region, by country, or by expense types. For example, one could report FX variances for operational expenses (Opex) for a certain country, just by following a few click-throughs. That report will also be flexible enough to enable a reader to drill down into specific line items if so desired.
As the new combined FX benchmark is built into the new system and applied worldwide, it means that the corporate now has more transparency about the business impacts of FX rate fluctuations, and this data is available to FP&A specialists and the boardroom alike.
Introducing the new procedure meant initiating many calls and meetings with regional controllers and corporate FP&A staff in order to agree upon using the treasury hedges rates as the plan rates and benchmark across the entire organisation. The same collaboration and communication was necessary to get the constant dollar concept for FX analysis accepted but it has been worth the effort. Treasury has slowly introduced the FX analysis into the FX risk committee meeting and gained company-wide acceptance. Once senior management saw the analysis consistently showing the un-biased hedge results, they started to acknowledge the merits of the new procedure.
The new FX variance analysis reporting process has helped Brocade’s FP&A specialists to understand the FX impact from cash flow, as well as from the hedging programme. It gives them better visibility into the FX variances and enables them to separate FX variances from forecast inaccuracy, giving a more accurate overview. As a result, the new system allows FP&A to focus on more important things such as analysing and reporting the real margins. Now the FX variances analysis report is ran by one person and completed with a few clicks. The total time spent on the whole analysis is only 20 minutes, versus multiple hours by multiple people to run similar analysis reports in the past.
The new report methodology is much more automated, efficient and effective in explaining the FX variances than previous models used by regional controllers. FP&A has become more productive because they no longer need to maintain complex and cumbersome models of their own, freeing them up to do more worthwhile work. In addition, the FX risk committee at Brocade and senior managers have gained extra visibility and understanding about the whole vista of FX impacts facing Brocade.
Management now has a clear sense of the effectiveness of the hedging transactions run by treasury and has high confidence in the corporate hedging programme. They are in a better position to make strategic decisions regarding future FX hedges or programmes moving forward and are much more comfortable discussing the topic with the extra data available to them. The project has helped enhance treasury’s reputation as a strategic partner to other functions in the corporation and build cross-functional trust and executive buy-in on the FX hedging programme, as well as substantially de-risking and improving the performance of Brocade’s FX operations.
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