ifm objectives

8/10/2019 ifm objectives

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S

International

Financial

Management


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Te essence ofinternational /nancial

management IFM0 is a popular concept ic means

management of /nance in an international *usinessen"ironment it implies doing of trade and ma$ingmone troug te e4cange of foreign currenc.

Te international /nancial acti"ities elp teorgani5ations to connect it international dealingsit o"erseas *usiness partners0 customers

suppliers lenders. It is also used * go"ernmentorgani5ation and non0pro/t institutions.

f


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Te main o*6ecti"e of international /nancialmanagement is to maximise shareholderwealth.

7dam Smit rote in is famous title 8Wealth ofNations9 tat if a foreign countr can suppl us

it a commodit Ceaper tan e oursel"es canma$e it *etter *u it of tem it some part ofte produce of our on in ic e a"e somead"antage.

Te essence ofinternational /nancial

management


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!asic Functions

!"#ISITI$% $F F#%&S 'FI%%!I%G&(!ISI$%)

Tis function in"ol"es generating fundsfrom internal as ell as e4ternal sources.

Te eort is to get funds at te loest costpossi*le.


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!asic Functions

I%*(STM(%T &(!ISI$%

It is concerned it deploment of teac;uired funds in a manner so as toma4imi5e sareolder ealt.


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%ature + Sco,e

The treasurer is responsi*le for :

/nancial planning analsis

fund ac;uisition

in"estment /nancing

cas management

in"estment decision and

ris$ management

!ontrollerdeals it te functions related to :

e4ternal reporting

ta4 planning and management

management information sstem

/nancial and management accounting

*udget planning and control and accounts recei"a*les etc.

Finance function of a multinational rmhas two functions


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(n-ironment at

International .e-el

te $noledge of latest canges in fore4 rates

insta*ilit in capital mar$et

interest rate =uctuations

macro le"el carges

micro le"el economic indicators

sa"ings rate

consumption pattern

in"estment *ea"ior of in"estors

e4port and import trends

Competition

*an$ing sector performance

in=ationar trends

demand and suppl conditions etc.

International nancial management ,ractitioners arere/uired the 0nowledge in the following elds


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Foreign exchange ris0

In a domestic econom tis ris$ is generall ignored *ecause a

single national currenc ser"es as te main medium of

e4cange itin a countr.

#en dierent national currencies are e4canged for eac

oter tere is a de/nite ris$ of "olatilit in foreign e4cange

rates.

Te present International Monetar Sstem set up is

caracteri5ed * a mi4 of =oating and managed e4cange rate

policies adopted * eac nation $eeping in "ie its interests.

In fact tis "aria*ilit of e4cange rates is idel regarded as

te most serious international /nancial pro*lem facing

corporate managers and polic ma$ers


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olitical ris0

Political ris$ ranges from te ris$ of loss >or gain? from

unforeseen go"ernment actions or oter e"ents of a

political caracter suc as acts of terrorism to outrigt

e4propriation of assets eld * foreigners.

For e4ample in 1@@2 Anron ,e"elopment Corporation a

su*sidiar of a Bouston *ased Anerg Compan signed a

contract to *uild Indias longest poer plant.

Dnfortunatel te pro6ect got cancelled in 1@@' * te

politicians in Maarastra o argued tat India did not

re;uire te poer plant. Te compan ad spent nearl E

3 million on te pro6ect


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(x,anded $,,ortunit

Sets

#en /rms go glo*al te also tend to *ene/t

from e4panded opportunities ic are a"aila*leno.

Te can raise funds in capital mar$ets ere costof capital is te loest.

Te /rms can also gain from greater economies ofscale en te operate on a glo*al *asis


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International Trade

Theories

Theor ofMercantilism

Theor of4solute !ost

d-antage

Theor of!om,arati-e

!ost

d-antage


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Theor of Mercantilism

Tis teor is during te si4teent to te tree0

fourts of te eigteent centuries.

It *eliefs in nationalism and te elfare of te

nation alone planning and regulation of

economic acti"ities for acie"ing te national

goals restriction imports and promoting

e4ports.

It *elie"ed tat te poer of a nation lied in its

ealt ic gre * ac;uiring gold from

a*road.


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Theor of Mercantilism

Mercantilists failed to reali5e tat simultaneous e4port

promotion and import regulation are not possi*le in all

countries and te mere control of gold does not

enance te elfare of a people.

Geeping te resources in te form of gold reduces te

production of goods and ser"ices and tere* loers

elfare.

It as re6ected * 7dam Smit and icardo * stressing

te importance of indi"iduals and pointing out tat

teir elfare as te elfare of te nation.


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Theor of 4solute

!ost d-antage Tis teor as propounded * 7dam Smit >1++)?

arguing tat te countries gain from trading if te

specialise according to teir production ad"antages.

Te pre0trade e4cange ratio in Countr I ould *e251B and in Countr II I52B.


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Theor of 4solute

!ost d-antage

If it is nearer to Countr I domestic e4cange ratio

ten trade ould *e more *ene/cial to Countr II and"ice "ersa.

7ssuming te international e4cange ratio isesta*lised I5IB6

Te terms of trade *eteen te trading partners oulddepend upon teir economic strengt and te*argaining poer.


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Theor of !om,arati-e

!ost d-antage

icardo >1-1+? toug adering to te

a*solute cost ad"antage principle of 7damSmit pointed out tat cost ad"antage to

*ot te trade partners as not a necessar

condition for trade to occur.

7ccording to icardo so long as te oter

countr is not e;uall less producti"e in alllines of production measura*le in terms

of opportunit cost of eac commodit in

te to countries it ill still *e mutuall

gainful for tem if te enter into trade.


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!ost d-antage

In te e4ample gi"en te opportunit cost of one

unit of 7 in countr I is .-@ >-H@? unit of good !and in countr II it is 1.2 >12H1? unit of good !.


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!ost d-antage

Te opportunit cost of te to goods are dierent in

*ot te countries and as long as tis is te case teill a"e comparati"e ad"antage in te production ofeiter good 7 or good ! and ill gain from traderegardless of te fact tat one of te trade partnersma *e possessing a*solute cost ad"antage in *ot

lines of production. Tus countr I as comparati"e ad"antage in good 7

as te opportunit cost of its production is loer in tiscountr as compared to its opportunit cost in countrII ic as comparati"e ad"antage in te production

of good ! on te same reasoning.


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International Business

Methods

icensing

Francising

Su*sidiaries and 7c;uisitions

Strategic 7lliances

A4porting


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icensing

.icense0means to gi"e permission. 7 license ma *e

granted * a part >licensor? to anoter part>licensee? as an element of an agreement *eteentose parties.

7 license ma *e issued * autorities to allo an acti"it

tat ould oterise *e for*idden. It ma re;uire paing

a fee andHor pro"ing a capa*ilit. Te re;uirement maalso ser"e to $eep te autorities informed on a tpe ofacti"it and to gi"e tem te opportunit to setconditions and limitations.


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Francising

Franchisingis te practice of selling te rigt to use a/rmJs successful *usiness model. For te francisor te

francise is an alternati"e to *uilding Jcain storesJ todistri*ute goods tat a"oids te in"estments andlia*ilit of a cain. Te francisorJs success depends onte success of te francisees. Te francisee is said toa"e a greater incenti"e tan a direct emploee*ecause e or se as a direct sta$e in te *usiness.

Te francisor is a supplier o allos an operator or afrancisee to use te supplierJs trademar$ anddistri*ute te supplierJs goods. In return te operatorpas te supplier a fee.


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Su*sidiaries and7c;uisitions

7 su4sidiar is a compan tat is completel or partl oned

* anoter corporation tat ons more tan alf of tesu*sidiarJs stoc$ and ic normall acts as a oldingcorporation ic at least partl or a parent corporation ollcontrols te acti"ities and policies of te daugter corporation.

Mergers and ac/uisitionsare *ot aspects of corporate

strateg corporate /nance and management dealing it te*uing selling di"iding and com*ining of dierent companiesand similar entities tat can elp an enterprise gro rapidl inits sector or location of origin or a ne /eld or ne locationitout creating a su*sidiar oter cild entit or using a 6oint"enture.


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Strategic 7lliances

7 strategic allianceis an agreement *eteen to or

more parties to pursue a set of agreed upon o*6ecti"esneeded ile remaining independent organi5ations. Tis

form of cooperation lies *eteen Mergers & 7c;uisitionM&7 and organic grot.

Partners ma pro"ide te strategic alliance it resources

suc as products distri*ution cannels manufacturingcapa*ilit pro6ect funding capital e;uipment $noledge

e4pertise or intellectual propert. Te alliance is acooperation or colla*oration ic aims for a snergere eac partner opes tat te *ene/ts from te

alliance ill *e greater tan tose from indi"idual eorts.


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Section II

General directions ofInternational Financial

Management


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Metods of capital!udgeting

7ccounting rate of return

Pa*ac$ period

Net present "alue

Pro/ta*ilit inde4

Internal rate of return

Modi/ed internal rate of return

A;ui"alent annuit

eal options "aluation

Tese metods use teincremental cas =os fromeac potential in"estment orpro6ect


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Factors in=uencing Capital!udgeting

7"aila*ilit of funds

Structure of capital

Ta4ation Polic

(o"ernment Polic

ending Policies of Financial Institutions

Immediate need of te Pro6ect

Aarnings

Capital eturn

Aconomic Kalue of te Pro6ect

#or$ing Capital

7ccounting Practice

Trend of Aarning


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Foreign PortfolioIn"estment

Foreign ,ortfolio in-estmentis te entr of funds into acountr ere foreigners ma$e purcases in te countrs

stoc$ and *ond mar$ets sometimes for speculation.

It is a usuall sort term in"estment as opposed to telonger term Foreign ,irect In"estment partnersipin"ol"ing transfer of tecnolog and $no0o.

Foreign Portfolio In"estment 'FI): passi"e oldings ofsecurities and oter /nancial assets ic do N


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#or$ing CapitalManagement

#or$ing capital management is concerned it te pro*lems tatarise in attempting to manage te current assets te currentlia*ilities and te interrelations tat e4ist *eteen tem.

Current assets refer to tose assets ic in te ordinar course of*usiness can *e or ill *e con"erted into cas itin one earitout undergoing a diminution in "alue and itout disruptingte operations of te /rm.

A4amples0 cas mar$eta*le securities accounts recei"a*le andin"entor.

Current lia*ilities are tose lia*ilities ic are intended at teirinception to *e paid in te ordinar course of *usiness itin aear out of te current assets or te earnings of te concern.

A4amples0 accounts paa*le *ills paa*le *an$ o"erdraft andoutstanding e4penses


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Concepts and ,e/nitionsof #or$ing Capital

Tere are to concepts of or$ing capital:

Gross and %et

(ross or$ing capital0 means te total current assets.

Net or$ing capital0 can *e de/ned in to as0

o Te dierence *eteen current assets and current lia*ilities.

o Te portion of current assets ic is /nanced it longterm funds


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,eterminants of #or$ingcapital e;uirement

(eneral nature of *usiness

Production ccle

!usiness ccle =uctuations

Production polic

Credit polic

(rot and e4pansion

Pro/t le"el

e"el of ta4es

,i"idend polic

,epreciation polic

Price le"el canges


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#or$ing capital: Policand Management

Te or$ing capital management includes and refers to te

procedures and policies re;uired to manage te or$ingcapital.

Tere are tree tpes of or$ing capital policies ic a /rmma adopt :

Moderate or$ing capital polic

Conser"ati"e or$ing capital polic

7ggressi"e or$ing capital polic.

Tese policies descri*e te relationsip *eteen te sales le"el

and te le"el of current assets.


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Tpes of or$ing capitalneeds

Te or$ing capital need can *e *ifurcated into permanent or$ing

capital and temporar or$ing capital.

ermanent wor0ing ca,ital Tere is alas a minimumle"el of or$ing capital ic is continuousl re;uired * a /rm inorder to maintain its acti"ities li$e cas stoc$ and oter currentassets in order to meet its *usiness re;uirements irrespecti"e of tele"el of operations.

Tem,orar wor0ing ca,ital


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Trade Finance

For a trade transaction tere sould *e a Seller to sell

te goods or ser"ices and a !uer o ill *u tegoods or use te ser"ices. Karious intermediaries sucas >*an$s Financial Institutions? can facilitate tistrade transaction * /nancing te trade.

#ile a seller >te e4porter? can re;uire te purcaser>an importer? to prepa for goods sipped tepurcaser >importer? ma is to reduce ris$ *re;uiring te seller to document te goods tat a"e*een sipped. !an$s ma assist * pro"iding "ariousforms of support.

Te folloing are te most famous


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Te folloing are te most famous,roducts7ser-icesoered * "arious

!an$s and Financial Institutions in Trade

Finance Segment:

.etter of credit Ban0 Guarantee

!ollection and &iscounting of Bills


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.etter of !redit

It is an underta$ing promise gi"en * a

!an$HFinancial Institute on *ealf of te!uerHImporter to te SellerHA4porter tat if teSellerHA4porter presents te compling documentsto te !uerJs designated !an$HFinancial Instituteas speci/ed * te !uerHImporter in te Purcase7greement ten te !uerJs !an$HFinancialInstitute ill ma$e pament to te SellerHA4porter


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Ban0 Guarantee

It is an underta$ing promise gi"en * a !an$ on

*ealf of te 7pplicant and in fa"our of te!ene/ciar. #ereas te !an$ as agreed andunderta$es tat if te 7pplicant failed to ful/ll iso*ligations eiter Financial or Performance as perte 7greement made *eteen te 7pplicant andte !ene/ciar ten te (uarantor !an$ on*ealf of te 7pplicant ill ma$e pament of teguarantee amount to te !ene/ciar upon receiptof a demand or claim from te !ene/ciar.


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!ollection and&iscounting of Bills

It is a ma6or trade ser"ice oered * te !an$s.

Te SellerJs !an$ collects te pament proceedson *ealf of te Seller from te !uer or !uerJs!an$ for te goods sold * te Seller to te !ueras per te agreement made *eteen te Sellerand te !uer.


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,i"idend Polic

&i-idend ,olic is concerned it /nancial policies

regarding paing cas di"idend in te present or paing anincreased di"idend at a later stage. #eter to issuedi"idends and at amount is determined mainl on te*asis of te companJs unappropriated pro/t andin=uenced * te companJs long0term earning poer.#en cas surplus e4ists and is not needed * te /rm

ten management is e4pected to pa out some or all oftose surplus earnings in te form of cas di"idends or torepurcase te companJs stoc$ troug a sare *u*ac$program.


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is$ Management

8is0 managementis te identi/cation assessment and

prioriti5ation of ris$s folloed * coordinated andeconomical application of resources to minimi5e monitorand control te pro*a*ilit andHor impact of unfortunatee"ents or to ma4imi5e te reali5ation of opportunities.

is$s can come from uncertaint in /nancial mar$ets

treats from pro6ect failures >at an pase in designde"elopment production or sustainment life0ccles?legal lia*ilities credit ris$ accidents natural causes anddisasters as ell as deli*erate attac$ from an ad"ersaror e"ents of uncertain or unpredicta*le root0cause.


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Metods of ris$management

Identif caracteri5e treats

7ssess te "ulnera*ilit of critical assets tospeci/c treats

,etermine te ris$ >te e4pected li$eliood and

conse;uences of speci/c tpes of attac$s onspeci/c assets?

Identif as to reduce tose ris$s

Prioriti5e ris$ reduction measures *ased on astrateg

i i l f i 0


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rinci,les of ris0management

is$ management sould:

create "alue resources e4pended to mitigate ris$ sould *e less tan te conse;uence of inaction or >as in"alue engineering? te gain sould e4ceed te pain

*e an integral part of organi5ational processes

*e part of decision ma$ing process

e4plicitl address uncertaint and assumptions

*e sstematic and structured process

*e *ased on te *est a"aila*le information

*e tailora*le

ta$e uman factors into account

*e transparent and inclusi"e

*e dnamic iterati"e and responsi"e to cange

*e capa*le of continual impro"ement and enancement

*e continuall or periodicall re0assessed


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Conclusions

Compared to national /nancial mar$ets international mar$ets a"e a

dierent sape and analtics. Proper management of international /nancescan elp te organi5ation in acie"ing same eLcienc and eecti"eness inall mar$ets ence itout IFM sustaining in te mar$et can *e diLcult.

Companies are moti"ated to in"est capital in a*road for te folloingreasons:

0ALcientl produce products in foreign mar$ets tan tat domesticall.

0


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Tan$ ou for 7ttentionO

ifm objectives

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