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Multinational Financial Management

What Is Multinational Financial Management?

Many companies operate internationally in some fashion. They may engage in commerce or transactions with customers, suppliers, and other businesses located in other countries. They may own or oversee operations, facilities, or offices in other countries to facilitate activity.

All businesses own financial resources to support their activities. Any business that operates internationally will own financial resources globally. Multinational financial management concerns the strategic oversight of these resources to help the business achieve its goals.

In What Context Is Multinational Financial Management Used?

All businesses own financial resources. A financial resource is any asset owned by the business that has monetary value and is highly liquid, meaning it can be converted to cash relatively quickly. Of course, cash is a financial resource, but many other assets fall into this category, such as loans, stocks, bonds, certificates of deposit, bank accounts, and credit.

Businesses may own financial resources domestically, which is in their home country or the country in which they operate primarily. Businesses that operate internationally will own multinational financial resources, too. Financial resources are important to a business because they support and enhance operations and goals. In the same way that an individual or family owns financial resources, such as a savings account to pay for vacations and college tuition, businesses own financial resources, such as investments or loans, to generate capital for business growth.

Financial management generally is the process by which businesses strategically monitor, analyze, and direct activities concerning their financial resources to maximize their business objectives. Multinational financial management consists of the same activities concerning financial resources that are spread across international borders.

Why Do Businesses Need Multinational Financial Management?

Businesses operate internationally for a variety of reasons:

  • Emerging markets in foreign countries provide some businesses an excellent opportunity for growth and expansion

  • Labor markets in other countries can sometimes offer businesses an opportunity to create their product at a lower cost

  • Some businesses need to expand into other countries for access to certain raw materials, products, or supplies that they cannot acquire domestically

  • Some nations offer unique specializations or highly skilled talent pools that businesses can tap into to help them produce a superior product

  • Many businesses find that their product or service is especially popular in other markets

  • Finally, regulations and tax laws in some countries may be friendlier to a particular business’s method of production or commerce

What Are the Basic Elements of Multinational Financial Management?

Financial management generally involves several basic steps:

  • A business must gather the important information related to its finances and decision-making

  • With that information at hand, the next step involves long-range planning and developing a strategy for how to manage financial resources

  • Specific tactics will provide direction to the business for implementing the strategy

  • A business must also monitor changing circumstances in the relevant environments and make appropriate adjustments

  • Lastly, businesses must implement their financial plans—involving decision-making, coordinating, and directing various action within the business

In many respects these steps apply equally to domestic and international financial management. However, there are important distinctions. While international commerce offers many unique opportunities, it also presents uncertainties.

In the process of implementing the basic steps of financial planning, businesses must also be mindful of several unique challenges when it comes to multinational financial management.

The politics of foreign countries can present many challenges. At the most basic level, the unfamiliarity of another country’s political environment can throw a curveball at a business’s strategic plan. In the extreme, politics in some countries can be extremely volatile and possibly even dangerous for a foreign operation.

Businesses that operate in other countries must also familiarize themselves with cultural and language differences. Attitudes about work, business, social interaction, and the product or service provided feed different and unfamiliar dynamics that can be positive or negative for a foreign owned business.

Similarly, market differences in other countries can impact the activities of a business.

All businesses need capital to function properly, and like cultural and market differences, the costs of capital can vary from one country to the next. These differences should be factored into the business’s financial planning.

Related to capital costs are the relevant currency exchange rates. Nations have their own currency, and in the case of Europe, several nations share one currency, the Euro. The value of each currency relative to another is different and changes daily. For example, one Mexican Peso may be worth less than one U.S. Dollar. A U.S. Dollar may be worth less than one Euro.

These exchange rates change daily. A business that operates in one or more of these countries will have to take separate steps to account for these vagaries as it concerns the revenue it receives, how and where this money is invested, and when and if it is converted to the business’s home currency.

Lastly, in each country the role of government in business is different, and the laws concerning taxes, the environment, consumers, and workers will vary. All these differences can significantly affect a business and its finances.


Why Is Multinational Financial Management Important?

All businesses own capital, or financial resources, that must be managed properly to support growth and day-to-day operations. Capital can be invested in assets and ventures to help the business stay competitive and expand into new areas.

Financial management is the process of managing these financial resources in such a way that they support the business’s objectives. When a business has multinational or international operations, it must manage its finances in a unique way. Multinational financial management is important because it allows a business to plan and strategize the utilization and investment of its financial resources in environments outside of its own country. It ensures that the business is accounting for, properly analyzing, and capitalizing on the unique circumstances and challenges presented by business opportunities in another country.

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