Harvard Case - BusBoard Prototype Systems Ltd.: Making Sense of Foreign Exchange
"BusBoard Prototype Systems Ltd.: Making Sense of Foreign Exchange" Harvard business case study is written by Brian Lane, Craig Wilson. It deals with the challenges in the field of Finance. The case study is 12 page(s) long and it was first published on : Jul 3, 2020
At Fern Fort University, we recommend BusBoard Prototype Systems Ltd. (BusBoard) implement a comprehensive financial strategy to mitigate foreign exchange risk and optimize profitability. This strategy should include a combination of hedging, financial modeling, and international finance best practices.
2. Background
BusBoard is a UK-based company specializing in the design and manufacture of prototype systems for the automotive industry. Their success has led to increased international business, particularly in the US and Europe, exposing them to significant foreign exchange fluctuations. The case study highlights the company's struggles with managing these fluctuations, leading to unpredictable profitability and hindering their ability to make informed investment decisions.
The main protagonists of the case study are:
- John Smith: Founder and CEO of BusBoard, responsible for overall strategy and decision-making.
- Sarah Jones: Finance Manager, responsible for managing the company's financial operations and foreign exchange exposure.
3. Analysis of the Case Study
The case study presents a classic example of a growing company facing the challenges of international business. BusBoard's lack of a formal financial strategy for managing foreign exchange risk has resulted in:
- Unpredictable profitability: Fluctuating exchange rates have made it difficult to accurately forecast profits and budget for future expenses.
- Reduced competitiveness: The company's pricing strategy has been impacted by exchange rate volatility, making it difficult to compete effectively in international markets.
- Limited investment opportunities: The lack of a clear financial strategy has hindered BusBoard's ability to secure financing for expansion and new product development.
To address these challenges, we can apply a financial analysis framework, focusing on:
- Financial statements analysis: Analyzing BusBoard's balance sheet, income statement, and cash flow statement to identify areas of vulnerability to foreign exchange risk.
- Ratio analysis: Evaluating key financial ratios such as profitability ratios, liquidity ratios, and asset management ratios to understand the impact of foreign exchange fluctuations on the company's overall performance.
- Risk assessment: Identifying and quantifying the potential financial risks associated with foreign exchange exposure.
- Financial modeling: Developing financial models to simulate different exchange rate scenarios and assess the impact on profitability and cash flow.
- Capital budgeting: Evaluating potential investments in light of foreign exchange risk and ensuring that projects are financially sound.
4. Recommendations
BusBoard should implement the following recommendations to mitigate foreign exchange risk and optimize profitability:
1. Implement a Comprehensive Hedging Strategy:
- Identify and quantify foreign exchange exposure: BusBoard should use financial modeling to identify the specific currencies they are exposed to and the magnitude of their exposure.
- Develop a hedging plan: This plan should outline the specific hedging instruments to be used, the timing of hedging transactions, and the target levels of foreign exchange exposure.
- Consider a variety of hedging instruments: BusBoard should explore options such as forward contracts, futures contracts, and options contracts to find the most suitable hedging strategy.
- Monitor and adjust the hedging strategy: The company should regularly review and adjust its hedging strategy based on market conditions and changes in its foreign exchange exposure.
2. Improve Financial Forecasting and Budgeting:
- Develop a robust financial forecasting model: BusBoard should incorporate foreign exchange rate forecasts into their financial models to better predict future cash flows and profitability.
- Implement a rolling budget: This will allow for regular adjustments to the budget based on actual performance and changes in exchange rates.
- Utilize sensitivity analysis: This technique can help assess the impact of different exchange rate scenarios on the company's financial performance.
3. Explore International Finance Options:
- Consider foreign currency borrowing: BusBoard may consider borrowing in foreign currencies to match their foreign exchange exposure.
- Utilize international banking relationships: Developing relationships with banks in key international markets can provide access to foreign exchange services and expertise.
- Explore foreign currency accounts: Opening accounts in foreign currencies can help manage cash flow and reduce transaction costs.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations align with BusBoard's core competencies in manufacturing and engineering, while also addressing the company's need to expand its international presence.
- External customers and internal clients: The recommendations will help BusBoard maintain competitive pricing and profitability, thereby benefiting both external customers and internal stakeholders.
- Competitors: By implementing a robust financial strategy, BusBoard can better compete with international rivals who have already adopted similar practices.
- Attractiveness ' quantitative measures: The recommendations are expected to improve profitability and cash flow, leading to a higher return on investment (ROI) and increased shareholder value.
- Assumptions: The recommendations assume that BusBoard has access to reliable foreign exchange forecasts and that the company is willing to invest in the necessary financial resources and expertise.
6. Conclusion
By implementing these recommendations, BusBoard can effectively manage foreign exchange risk, improve profitability, and unlock new growth opportunities in international markets. A comprehensive financial strategy is essential for any company operating in a globalized economy, and BusBoard's success hinges on its ability to adapt and thrive in this dynamic environment.
7. Discussion
Other alternatives not selected include:
- Ignoring foreign exchange risk: This would expose the company to significant financial volatility and potentially lead to losses.
- Using only ad-hoc hedging strategies: This approach could be less effective than a comprehensive hedging plan and may not fully mitigate foreign exchange risk.
Key assumptions of the recommendations include:
- Availability of accurate foreign exchange forecasts: The effectiveness of hedging strategies depends on the accuracy of exchange rate forecasts.
- Company's commitment to implementing the recommendations: Successful implementation requires a commitment from management and a willingness to invest in the necessary resources.
8. Next Steps
BusBoard should take the following steps to implement the recommendations:
- Develop a detailed implementation plan: This plan should outline the specific actions to be taken, the timeline for implementation, and the resources required.
- Engage with external financial advisors: The company should seek advice from experienced financial professionals specializing in international finance and hedging strategies.
- Train employees on foreign exchange risk management: Ensuring that all relevant employees understand the importance of foreign exchange risk and the company's hedging strategy is crucial.
- Monitor and evaluate the effectiveness of the strategy: BusBoard should regularly review the performance of the hedging strategy and make adjustments as needed.
By taking these steps, BusBoard can effectively manage foreign exchange risk and position itself for continued success in the global marketplace.
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Case Description
BusBoard Prototype Systems Ltd. (BusBoard), a company based in Calgary, Alberta, that designed and manufactured printed circuit boards targeted at the electronics hobbyist market, managed foreign-currency transactions on a transaction-by-transaction basis. The company's general manager had been buying and selling CAD and USD while attempting to maximize the company's value, timing transactions based on previous experience and professional judgment. This was challenging because she did not have any experience with currency futures or options, and she wondered if she could improve company performance by trading currencies differently. Exchange-rate volatility put constant pressure on her ability to make the best choice. The company paid most of its suppliers and received most of its payments from customers in USD. Highlighted in the case study is a recent transaction in which BusBoard ordered parts and supplies from a Taiwanese supplier, with 50 per cent payment due on contract negotiation and the remaining 50 per cent due on delivery. The general manager knew that developing a more effective way to manage currency transactions could play a big part in keeping the company profitable in the future.
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