International Aspects of Budgeting:
A multinational company faces special problems
when preparing a budget. The problems arise because of fluctuations in foreign
currency exchange rates, the high inflation rates found in some countries, and
local economic conditions and governmental policies that affect everything from
labor costs to marketing practices.
Fluctuations in foreign currency exchange rates
create unique budgeting problems. Exporters may be able to predict with some
accuracy their sales in the local foreign currency such as South African rand or
Swiss francs. However, the amounts they eventually receive in their own currency
will depend on the currency exchange rates that prevail at the time. If, for
example, the currency exchange rates are less favorable than expected, the
company will ultimately receive in its own currency less than it had
anticipated.
Companies that are heavily involved in export
operations often hedge their exposure to exchange rate fluctuations by buying
and selling sophisticated financial contracts. These hedges ensure that if the
company loses money in its exporting operations because of exchange rate
fluctuations, it will make up that loss with gain on its financial contracts.
The details of such hedging operations are covered in financial text books and
websites. When a multinational company uses hedging operations, the costs of
those activities should be budgeted along with other expenses.
Some multinational companies have operations in
countries with very high inflation rates--sometimes exceeding 100% a year. Such
high inflation rates--called hyperinflation--can render a budget obsolete
very quickly. A common budgeting tactic in such countries is to reduce the lead
time for preparing the budget and to revise the budget frequently throughout the
year in the light of the actual inflation experienced to date.
In addition to problems with exchange rates and
inflation, multinational companies must be sensitive to government policies in
the countries in which they operate that might affect labor costs, equipment
purchases, cash management, or other budget items.
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