International Aspects of Budgeting
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.