International businesses should necessarily have determined, flexible, approachable, and innovative employees who have a clear understanding of when to capture expansion opportunities. That's how effective Multinational Financial Management can be done within huge enterprises.
Moreover, they should understand international economics to expect the impact on their bottom line and global markets for effective communication of their organization’s culture to various audiences.
However, if you do not understand international markets properly, it could be risky as the products of various international companies are not always customized for the markets. Multinational Corporate Finance is big and the international markets possibly have various cultural understandings and preferences about the product.
Companies operating internationally conduct business across national borders, by selling goods, products, or services to customers in foreign countries, establishing branches or joint ventures in foreign markets, or using material or labor from overseas producers.
These are some examples of companies operating internationally:
- Coca-Cola: One of the largest beverage companies operating in over 200 countries and territories across the world
- Toyota: This Japanese automaker owns production facilities and sales networks in various countries such as the U.S, China, and Europe
- Nestle: This Swiss food and beverage giant operates in over 190 countries having more than 2000 brands
- Samsung: This South Korean technology company has made a global presence, with manufacturing facilities, Research and Development centers, and sales offices in various countries
- HSBC: It is one of the world’s largest banks, operating in more than 60 countries, and has made a remarkable presence in Asia, Europe, and North America
This article discusses multinational financial management.
What is Multinational Financial Management?
Multinational financial management involves making financial decisions, managing foreign exchange risk, and complying with local tax laws and regulations. This involves analyzing exchange rate movements, managing foreign exchange exposure, making capital budgeting decisions, and managing working capital effectively. The objective of MFM is to maximize shareholder value while minimizing financial risks associated with international operations.
Most companies operate internationally in their own style. They either prefer commerce or transactions with customers, producers, and various businesses from other countries. Some companies may own or manage operations, facilities, or offices in other countries to enhance business activities.
Businesses own financial resources to support their activities. A business functioning internationally owns financial resources at a global level.
Multinational financial management is related to the strategic failure of the resources to enable businesses in achieving their goals.
Financial management refers to the process whereby businesses prospectively control, assess, and control the activities related to their financial resources to optimize the business objectives.
Why should businesses have Multinational Financial Management?
Businesses internationally operate for the following reasons:
- To utilize markets in other countries that provide exceptional opportunities to certain businesses for better growth and expansion
- Identify Labor markets in foreign countries often provide businesses with opportunities to create their product at minimum cost
- To plan and make International Investment decisions to diversify the business
- Doing Businesses expansions to other countries to access raw materials and products that are not accessible in their own countries
- Most businesses realize that their products or services are in demand in other countries
- Tax laws and regulations in certain countries might be friendlier to methods of production of certain businesses
Key Considerations of Multinational Financial Management
Here are the financial considerations to conduct business internationally:
- Legal and Administrative Commitments: You must observe all the legal and administrative requirements of the target country, such as tax codes, business guidelines, packaging standards, and custom policies.
- Currency Exchange Rates: The vital component of international business is pricing the products or services in the currency of the target country. If you do not follow this, you could lose important customer relationships.
- Economic & Managerial conditions: If you do not have experience in internal business, you must make sure to consider the economical condition of the country you chose. You must also ensure that the business environment of the target country is similar to yours.
- Maintaining Companys Growth: Calculating the cost of conducting business internally is more complex than doubling the expenses of domestic operations. You need to have increased operating expenses with different costs associated with importing/exporting, packaging standards, and distribution.
How to do Multinational Financial Management?
Earlier, the finance-related function in huge firms in foreign countries had focused on cost control, managing budgets, and internal auditing. However, as corporations went global, a world of finance opened up within them, with new opportunities and challenges for the CFOs (Chief Financial Officers).
The financial opportunities for global firms are influenced by institutional and managerial forces in the following crucial functions:
- Risk Management
- Capital Budgeting
Institutional variations across the operations of a company allow the abundant scope of creating value through effective financing decisions. As the interest is verifiable, a CFO can remarkably reduce the total tax bill of a group by excessively borrowing in countries with higher tax rates and lending excess cash to operations in countries with lower tax rates.
Multinational companies could take advantage of their internal capital markets to obtain a competitive advantage when funding for local firms becomes expensive. For instance, when the Far east experienced a currency crisis in the 1990s, and the region struggled to raise capital, many U.S. and European multinationals increased the financing to their local offices.
The internal capital market widens the risk management options of a company. For example, instead of managing currency exposures through the financial market, global companies can balance currency exposures through their operations worldwide.
Although functioning globally demands financial expertise, the organizational strategy requires this expertise to be limited so that the financial objectives don’t dominate operating ones.
Apart from exposing the internal financial market to manage the operations and the external financial markets, CFOs play a significant role by valuing investment opportunities. The company’s attempts to enhance the capital investment decision show the challenges faced by the CFOs while moving from domestic to foreign markets. Firms should ensure that their finance professionals largely discuss the probable risks with the country managers who clearly understand them.
Key Financial Advice For Businesses Operating Internationally
- Political and economic risks occur when a country lacks the commitment to the laws. Companies could prepare themselves for changeability by thinking through incredible situations and planning their response when such situations take place.
- Multinational firms organize their financial operations in centralized, decentralized, hybrid organization culture. Centralization enables the company to gain the advantage of size to invest and borrow activities that minimize transaction costs and help the firm to get the most competitive pricing.
- On the other hand, a decentralized organizational culture enables the firm to identify the differences in language, customs, cultures, business activities, laws, and regulations among various countries.
- It is necessary that the regional CFOs regularly contact corporate headquarters to alert them of opportunities or warn them of the dangers or risks in their countries.
- Islamic countries implement Sharia- ban of charging interest of money. There are approved, Sharia-compliant options to interest and sample investments. An alternative investment strategy- Musharakah, enables sharing the profit and loss. Musharakah involves sharing profits per an approved ratio and sharing losses in proportion to the investment of each partner.
Financial Management Consulting
BMS Auditing is a pioneer in financial management consulting in the UAE and across the world. BMS has offices in the U.S, U.K., India, apart from the GCC countries and hence has been serving its international clients for over a decade with its quality services in financial management.
BMS helps you to optimize the opportunities to manage profitable growth, replan organizational structure and acquire the potential of information.
Our financial consulting team has extensive knowledge in both accounting and finance, along with updated knowledge of the latest technologies to help in optimizing opportunities to grow, enhance and protect the business in the present and in the future. We also conduct audits for multinational companies and give the best international tax planning with top registered tax agents.
We consistently develop our consulting services to meet the requirements of drastically evolving digital standards and your ever-changing goals for success.