Financial Management in Multinational Organizations - Research Paper Example

?Running Head: Financial Management in Multinational Organizations Financial Management in Multinational Organizations [Institute’s Name] Executive Summary The key purpose of financial management in multinational organizations is to maximize shareholder wealth. This would involve taking sensible investment as well as financing decisions that would add value to the business. One of the core reasons for concentrating on shareholder wealth is that the businesses that are failed to do so may be taken over by other companies. In addition, it becomes convenient for an organization to draw additional funds from the shareholders if it supports shareholder wealth maximization. Financial management also helps organizations in financial planning and controlling, and evaluation of risks. It has been rightly argued that maximizing shareholder value perhaps only most effective method to benefit every stakeholder. Table of Contents Executive Summary 2 Introduction 4 Maximizing Shareholder Value 5 Financial Planning and Control 6 Forecasting 7 Investment 7 Exchange Risk 7 Credit Risk 10 Conclusion 10 References 13 Introduction Multinational organizations are firms that take part in some type of global business. Their financial management involves global investing as well as financing choices that are planned to capitalize on the worth of the multinational organization. Firms may primarily try to sell products abroad to a specific nation or trade supplies in from an overseas producer. However, in due course a number of them identify further prospects and finally start subsidiaries within foreign nations. International financial management is vital even for firms that have no global dealings. These firms are required to be familiar with how their overseas rivals will be influenced by activities within “exchange rates, foreign interest rate, labor costs” (Kyaw et al, 2011, p. 21), and price rises. Management is encouraged to accomplish many targets and goals, a number of which conflicts with one another. These conflicts take place as the firm has several components, for instance, stakeholders, human resources, clientele, creditors, contractors, and the neighboring population, whose wants do not essentially match. It is management’s job to satisfy such contradictory wants. Therefore, the contradictory goals increase the issue of setting priorities. When tough competition exists within the home country, a business may rely on entering or expanding its overseas base. Nonetheless, if a corporation is ineffective within the home market, it is expected to have difficulties in a foreign country also. Additionally, the controller should be aware of local traditions as well as risks within the global markets. A large, stable corporation with considerable global experience may ultimately have completely owned subsidiaries. On the other hand, a small business with restricted foreign understanding functioning in uncertain fields may be limited to export and import operations. If the corporation`s sales force has nominal knowledge in export sales, it is wise to employ foreign agents when expert understanding of foreign markets is considered necessary. When adequate amount exists, the corporation may set up a foreign branch sales office together with sales group as well as technical service workers. When the function establishes, manufacturing services may be positioned within the foreign market. Nonetheless, a number of foreign nations need authorization earlier than foreign sales and production can go on; here, a “foreign licensee sells, and produces the product” (Li & Tallman, 2011, p. 56). A setback with this is that classified data and understanding are provided to the licensees who can then turn into a rival at the termination of the contract. Maximizing Shareholder Value The generally acknowledged purpose of a multinational organization is to capitalize on stockholder capital on an international basis, as revealed by stock value. The stock value shows the market’s appraisal of the firm’s likely earning flow in due course, the risk of this flow, the dividend plan, and quality characteristics of the firm’s upcoming activities. Quality features of potential activities take account of constancy, diversification, and expansion of sales. In a number of nations, for instance, Germany and Japan, the objective of a business is to capitalize on corporate capital. Corporate capital incorporates not just the business’s stockholder assets but its advertising, technological and human resources as well. A business may have to take care of its shareholders at the same level with other corporate components. In other words, financial management attempts to boost the company capital for the profits of every component. There are several undeniable reasons for board to concentrate on stockholder wealth maximization. Primarily, because stockholders are the proprietors of the business, board has a fiduciary commitment to work in their benefit. Second, stockholders offer the risk capital that shields the interests of other components. Third, stakeholder wealth maximization - a high stock value - offers the unsurpassed cover in opposition to a hostile takeover or a compulsory company streamlining. Fourth, if a business improves stakeholder value, it is convenient for the business to create a center of attention for further equity capital. For these as well as other reasons, several financial economists think that shareholder wealth maximization is the single approach to capitalize on the monetary benefit of every component. Firms listed at Hong Kong stock exchange finds the most significant standard administering capital formation decision is maximization of stakeholders’ wealth. Multinational organizations now put their stress on rewarding shareholders so that they can acquire finances simply to sustain their processes. These organizations are often described as the set of the agreements; one of the agreement claims is a “residual claim (equity) on the firm’s assets and cash flow” (Megginson et al, 2012, p. 123). The equity agreement is a principal-agent connection. Financial Planning and Control For the purpose of control, the financial management helps in setting principles, for instance, financial statements, for evaluating real performance with projected performance. It helps in preparation of the financial plan and management of its process. The foreign exchange market as well as international accounting has an important part in multinational corporation’s efforts to carry out its planning and control task. For instance, once a business goes beyond national limits, its return on investment relies not just on its trade gains or losses from national business functions, but from exchange gains or losses from currency instabilities as well. Global reporting as well as controlling has to do with the systems for controlling the functions of a multinational organization. Important financial information is the foundation of successful administration. Precise economic statistics are mainly significant in global trade, where business functions are usually administered remotely. Forecasting Multinational organization has to plan; it should take into account different management strategies and organize capital as well as operating resources and “alternative funding and cash budget possibilities” (Fatemi, 2012, p. 103). Financial management plays a vital part in the preparation of potential financial statements that try to forecast the outcome of the organization in upcoming times. This asks for significant understanding of the business and the issues that are expected to decide its potential results. “Financial forecasts are prospective financial statements” (Fatemi, 2012, 104) that show an organization’s estimated financial situation, outcomes of processes, and cash flows during upcoming times in two different forms. Investment When the business plans for allocation of funds, the most critical task of financial management is to invest finances wisely in the firm. All the cash invested has other uses. Therefore, funds should be distributed among assets in a way that they will make wealth of the firm’s stockholders wealth. “There are 200 countries in the world where a multinational corporation such as Royal Dutch/Shell can for example invest its funds. Evidently, there are more investment opportunities in the world than in a single country, but there are also risks” (Iatridis & Alexakis, 2012, p. 68). Exchange Risk Even though a decision to disregard the difficulties of international financial management may tempt a number of organizations, few actually have that choice within the contemporary world financial system. For instance, some auto parts producer decides to stay away from any global activity. Despite the fact that that the business will then not have to be afraid of foreign political threat or global credit risk, administration could still gain from understanding of exchange rates as well as their relation link with interest rates and inflation rates. The ambiguity regarding the potential ratios of exchange amid currencies initiated exchange risk into financial deals. Exchange risk as well involves doubts regarding variations in interest rates as well as inflation rates among countries. The link between interest rates, inflation rates, and exchange rates is not unexpected. Interest rates are “measures of the costs and rewards of borrowing and lending currencies” (Chen et al, 2010, p. 42). Inflation rates calculate alterations within the basic value of currencies over time. Exchange risk exists when the agreement is written according to the foreign currency. In addition, when organizations invest within a foreign market, the profit on the foreign investment with respect to the U.S. dollar relies not just on the return on the foreign market in terms of home currency but as well on the alteration in the “exchange rate between the local currency and U.S. dollar” (Chen et al, 2010). The idea of exchange risk within trade agreements is explained in the following examples. In first example, Canadian automobile distributor agrees to purchase an automobile from the producer in Vancouver. The distributor agrees to give 30,000 CAD on acquisition of the automobile, which is likely to be 30 days from the finalization of deal. The automobile is delivered on the thirtieth day and the distributor gives 30,000 CAD. Here, it should be noted that from the day this agreement was written until the day the automobile was delivered, the customer was aware of the exact payable Canadian dollar sum. To say it differently, there was no doubt regarding the cost of the agreement. In the second example, a Canadian car distributor signs a deal with a British dealer to purchase an automobile from UK for 9,000 pounds. The sum is to be paid on the delivery of the automobile 30 days from the finalization of deal. The range of spot rates that on the day of deal finalization was 2.00 CAD to 2.10 CAD.? On the thirtieth day, the Canadian importer will disburse a particular amount in the range of 9,000 x 2.00 CAD = 18,000 CAD to 8,000 x 2.10 = 18,900 CAD for the automobile. Until the date of delivery, the Canadian firm is doubtful about its potential CAD outflow. That is, the CAD value of the agreement is doubtful. These two examples help exemplify the design of foreign exchange risk within global trade agreements. In the first example of the domestic trade agreement, the precise CAD sum of the upcoming disbursement is identified with assurance. In the second example of the international trade agreement, where the agreement is written in the foreign currency, the accurate CAD amount of the agreement is not identified. The unpredictability of the exchange rate brings inconsistency in the upcoming cash flow. This is the risk of exchange rate alterations, exchange risk, or currency risk (Ehrmann et al, 2011). Exchange risk exists when the agreement is written in the foreign currency or denominated in foreign currency. There is no exchange risk if the international trade agreement is written in the domestic cash. That is, in second example, if the agreement were written in CAD, the Canadian importer would not be facing any exchange risk. With the agreement written in CAD, the British exporter would tolerate the entire exchange risk, because the British exporter`s upcoming pound receiving would be doubtful. To be precise, he would get imbursement in CAD, which would have to be changed into pounds at an unidentified ‘pound to CAD’ exchange rate. In international deals, at least one of the two parties tolerates the exchange risk. Some forms of international trade agreements are written in a third currency, separate from either the importer`s or the exporter`s domestic currency. In second example, the agreement might have been written in the United States dollar. With a USD agreement, both the importer as well as the exporter would be exposed to exchange rate risk. Credit Risk When a country`s insight on its own interest transforms, its profitable, dogmatic, and tax regulations, together with its structure of government can transform. If such alterations take place, investors as well as international organizations can experience unanticipated losses. The officially authorized policy of independent immunity avoids improvement within the courts of one country, losses that were the outcome of political act in a different nation. Political threat, occasionally known as sovereign or nation risk, indicates the doubts surrounding the prospect of losses that might be caused by alterations within an independent country`s business regulations, regulations, or taxes. International credit risk is like political risk; it refers to doubts as well as possible business losses that are caused by variations in business regulation among countries. Nonetheless, political and credit risk are diverse. While political risk indicates the doubts regarding possible alterations in a country`s business regulations, credit risk indicates the doubts regarding the nature of the existing current business regulations. For instance, a Canadian corporation ships goods to an American dealer and indicates payment within 90 days. “How does the exporter evaluate the creditworthiness of the importer, and what recourse is there in the event of default” (Li, 2010, p. 203)? Conclusion International financial management is a comparatively new. Until in recent times, multinational business managers have been able to disregard a great deal of the global financial situation. Nonetheless, the quick growth as well as growing incorporation of the international financial system now needs that executives and investors have an operational understanding of financial management for multinational organizations. Financial managers of these organizations need a perceptive of the intricacy of international financial management to take sensible economic and investment decisions. Multinational finance involves consideration of dealing with working capital, funding the organization, power on foreign exchange as well as political threats, and foreign direct investments. In particular, the financial management helps in knowing how alterations in foreign exchange rates have an effect on receivables as well as payables and imports and exports of the company in its multinational functions. The financial management gives insights and responds to issues that a variety of business executives and investors face (Lane & Maria, 2011). Whether or not a business is involved in multinational operations, knowledge of the perceptions, theories, and systems of international financial management can enhance the success of business executives. The function of the financial management, particularly in multinational organizations is shifting as a result of scientific progress that have considerably decreased the amount of time it requires to create financial information. Scientific developments have made it convenient to generate financial information, and, as a result, financial managers currently do more data analysis that lets them to offer senior management with revenue maximizing plans. They usually work in groups, operating as business consultants to board members. They should never let the authority or control they have direct them to overlook that there are others whose inputs must be considered and assessed during the decision-making procedure. A high-quality decision taken by the financial management team will improve the value of the multinational corporation along with its stocks whereas the poor decision taken will possibly turn into the cause of failure for the multinational organization. References Chen, H., Tang, Q., Jiang, Y., and Lin, Z. (2010). ‘The Role of International Financial Reporting Standards in Accounting Quality: Evidence from the European Union’. Journal of International Financial Management & Accounting. Vol. 21(3), pp. 220-278. Ehrmann, M., Fratzscher, M. and Rigobon, R. (2011). ‘Stocks, bonds, money markets and exchange rates: measuring international financial transmission’. Journal of Applied Econometrics. Vol. 26(6), pp. 948-974. Fatemi, A. M. (2012). ‘Shareholder Benefits from Corporate International Diversification’. The Journal of Finance. Vol. 59(4), pp. 1325-1344. Iatridis, G., and Alexakis, P. (2012). ‘Evidence of voluntary accounting disclosures in the Athens Stock Market Purpose – The purpose of this paper is to explore the motives for providing voluntary accounting disclosures and investigate’. Review of Accounting and Finance. Vol. 1(1), pp. 73-92. Kyaw, N. A., Manley, J., and Shetty, A. (2011). ‘Factors in multinational valuations: Transparency, political risk and diversification’. Journal of Multinational Financial Management. Vol. 21(1), pp. 55-67. Lane, P. R., and Maria, G. (2011). ‘Cross-Border Investment in Small International Financial Centres’. 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