Large project-based organizations are working in a multinational, multi-currency environment struggle with how best to deal with currency issues when managing projects and reporting project and organization financial performance.

When dealing with currencies in a project environment, the following types of currencies come into play:

1. Functional Currency: The currency in which the financial books are maintained
2. Contract Currency: The currency in which the contract for the project is written
3. Project Currency: The Currency in which the project is managed. This may differ from the functional currency and may even be the contract currency.
4. Cost Currency: The currencies in which cost is incurred.
5. Revenue Currency: The currency in which revenue is accrued is often the functional currency in which the project is set up.
6. Invoice Currency: The currency in which the project is to be invoiced.
7. Reporting Currency: This is the one currency in which all financial information across all projects is consolidated for management reporting.

Project-based organizations run the gamut on the maturity scale in dealing with currencies. Some organizations are taking the first steps in expanding beyond current national boundaries, and the issues involved keep them within their current currency boundary. They tend to execute solely in their primary currency only. On the other end of the scale are experienced multinationals that execute projects requiring serious hedging of currencies to maintain their margins.

Today we will address organizations from the lower end of the scale to those somewhere in the middle. To execute and manage effectively, the following currency setups are suggested for projects:

1. Project currency = Functional Currency: This removes 1 level of complexity from the project manager’s plate and allows them to manage the project without the additional burden of currency management.
2. The Contract and Invoice Currencies should be as specified by the client. Again, this is typically negotiable with the client to determine who incurs the currency risk, the project organization, or the project client.
3. The Budget Currency should be the project/functional currency, and all budget v/s actual variances should also be managed in the project currency. This makes the budgeting process more accessible.
4. Costs may be accrued in any currency, and revenue should be incurred in the functional currency to keep things nice and straightforward.

In light of this setup, let’s tackle reporting at two levels: single-project reporting and organizational reporting.

Single Project Reporting
Reporting for a project is primarily for project management purposes; hence, all financial reporting for the project manager should be provided in the project/functional currency. Furthermore, as budgets and forecasts are also defined in the project/functional currency, all variance reporting is easy.

Organization Reporting
Reporting for project organizations is typically accomplished in the following currencies:

1. Functional Currency: This works well for organizations (and rollups) within a currency boundary.

2. Global Reporting Currency: This is a currency in which financial information is consolidated across currency boundaries for management reporting. This currency is typically set to the currency in which the organization maintains its primary or management offices.

Setup and Maintenance of Global Reporting Currency
1. As mentioned above, the functional currency of the organization’s central office location should be set up as the global reporting currency for ease of management reporting.

2. Exchange rates for converting projects from other currencies to the Global Reporting currency should ideally be setup with

a. Conversion rates to the global reporting conversion should be set up as fixed rates for any given year. This allows management and project managers to measure the project’s performance without including variances due to currency fluctuations.

b. Conversion rates will also be needed for future months/years to convert budget and forecast project amounts. These future amounts should be refreshed yearly based on the latest rates at the end of a given fiscal year. Again, this may require budget/forecast amounts to be reconverted to use the new rates.

Any variations from the management reporting numbers so derived will differ from the financial numbers from the official books due to exchange rate variances.

Following this simplified approach allows any project organization to expand into the international arena while protecting their project managers and leaving the currency issues to experts in the finance organization.

That’s it for now, and remember:

There is no better way to manage a business than to Manage by Project.

PS: I welcome all comments/trackbacks/pingbacks/queries to my nascent venture here. I will try and respond to your comments, etc., in future entries.