Note on Financial management in international business

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Financial management in international business

In the global business world, International managers are more concerned about the financial management that includes receivable management, cash management, inventory management, fund management and so on. The principle objectives of global money management are to utilize the firm's cash resources in the most efficient way and to minimize the firms global tax liabilities. Global financial management can be important source of competitive advantage. It can help both to reduce the costs of creating value and add value by improving customer service. It is different because of the different currency of different countries, dissimilar political situations, imperfect markets, diversified opportunity sets. It is the popular concept of management of finance in an international business environment that makes doing of trade and making money through the exchange of foreign currency. The international financial activities help the organizations to connect with international dealings with international business customers, suppliers and lenders. It is also used by both the government organization and non-profit organization. The scope of financial management includes three decisions. They are investment decision, financing decision and money management decision. The financial management deals with the two major functions.

  1. Acquisition of financial resources: Acquisition of financial resources involves in the generating the funds from internal as well as from external sources. This functions helps to get the funds at lowest cost.
  2. Allocation of financial resources: This function of allocation of resources invloves in allocating the financial resources .

Key functions in international financial management

The functions of international financial management involves the acquisition and use of funds cross broaders. Chief financial officer is responsible for organizing financial activities in the international business activities.The role of CFO responsible to handle the financial planning, keeping record and report financial to the high level of management. Some of the major function of international financial management includes

  • Deciding on capital structure
  • Raising fund for international operation of the firm
  • Management of working capital and cash flow
  • Capital budgeting for international operation
  • Management of the currency risk
  • Management of international accounting and tax practices

Sources of fund for international operation

  1. Global equity financing: Global equity financing is the selling shares to the investors. Shareholders are to be paid dividend out of profit. The main advantage is that the firm obtains capital without debt but the existing management may loose control in the company's decision.
  2. Global debt financing: Global debt financing is the borrowing of money from the bank or other resources to raise the capital. The main advantage of global debt financing is that the firm does not scrifice any ownership to obtain required capital and disadvantage is that there is continuous burden of the interest.

Investment decision

Investment decision is the decision regarding investment. It is related about what activities to finance. Sound capital investment decision is critical to the survival and long term success of the firm. Investment is financially justified if the present value of expected cash flow is greater than the present value of expected cash outflow. Hence, capital budgeting is the strategically important decision for overall growth and diversification of the business.

Global E-marketing strategy

Tax practices: Taxation is the means through which the government generates revenue. It is the most important issue of international business manager because each government collect tax out of the business activities. Tax practices and system differs according to the philosophy, ideology of the nation. There are two types of taxation system.

  • Direct tax
  • Indirect tax

Taxation matters in the foreign business due to the various reasons

  • Choice of the location for initial investment
  • Choice of operating firm like licensing, franchising
  • Choice of legal firm of new enterprise
  • Choice of method of financing

Eliminating multiple taxation

International business ,managers must be concerned for eliminating double taxation liabilities beacause it increases the costs and hampers in the competitive business environment. To avoid such practices, government use two major methods.

  1. Tax treaties: Tax treaties is the treaty with other countries so as to avoid the double taxation. Countries sign double tax avoidance treaties or agreement with one another.
  2. Foreign tax credit: Foreign tax credit are the automatic reduction in the domestic tax liabilities when the firm can prove that it has already paid tax abroad.

Currency risk management

International business managers must have to protect corporate assets from the exchange losses such that from losses due to the foreign rate changes or fluctuations. It is the duty of manager to have some ideas about currency risk management that may involve.

  • Defining and measuring risk exposure
  • Setting of monitoring and reporting system
  • Adopting a policy for risk exposure management
  • Formulating strategies for hedging

There are two types of strategies for hedging exposure such that operational and financial strategies. Operational strategies involve balancing exposed assets to exposed liabilities by the proper cash flow. Financial strategies involved using the forward contract options or other. Financial instruments to hedge an exposed position.

Features of International Finance management

Foreign exchange risk: In a domestic economy this risk is generally ignored because a single national currency serves as the main medium of exchange with in a country. When different national currencies are exchanged for each other, there is a definite risk of volatility in foreign exchange rates. The present International Monetary System set up is characterized by a mix of floating and managed exchange rate policies adopted by each nation keeping in view its interests. In fact, this variability of exchange rates is widely regarded as the most serious international financial problem facing corporate managers and policy makers

Political risk• Political risk ranges from the risk of loss (or gain) fromun foreseen government actions or other events of apolitical character such as acts of terrorism to outrightexpropriation of assets held by foreigners.• For example, in 1992, Enron Development Corporation,a subsidiary of a Houston based Energy Company,signed a contract to build India’s longest power plant.Unfortunately, the project got cancelled in 1995 by thepoliticians in Maharashtra who argued that India didnot require the power plant. The company had spentnearly $ 300 million on the project.

Expanded Opportunity Sets• When firms go global, they also tend tobenefit from expanded opportunities whichare available now.• They can raise funds in capital markets wherecost of capital is the lowest.• The firms can also gain from greatereconomies of scale when they operate on aglobal basis.

Market Imperfections• domestic finance is that world markets todayare highly imperfect• differences among nations’ laws, taxsystems, business practices and generalcultural environments

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