Financial Issues for Multinationals

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Numerous financial issues confront multinationals as they expand overseas

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Financial Issues for Multinationals

  1. 1. FINANCIAL ISSUES FOR MULTINATIONALS
  2. 2. ACCOUNTING IntroductionMultinationals need a common accounting language, for all their overseas operations, to graspthe overall picture of their financial position globally before they can exercise control and managetheir risks. Most countries accept the International Financial Accounting Standards Board (IFRS)as the universal language of accounting and US multinationals are making the transition toadopting it. Global consulting companies can align the two standards at lower costs. SAS 70Intro: Multinationals are complying with an expanded mandate for corporate governance whichnow includes the extended enterprise. They are expected to institute internal controls for all thirdparties who manage their business processes.Body: SAS 70 mandates that multinationals institute adequate internal controls for all theiroverseas partners, just as Section 404 does for domestic business, to detect any materialweakness in the enterprise before it results in an unanticipated deterioration in financialperformance. Compliance needs warrant that multinationals look for partners who are not onlycheaper options for sourcing but also a good fit in terms of culture, technology solutions,management team and reputation. Nair and Co has the knowledge to find the partners who havethe complimentary business processes to be best able to meet compliance needs. GENERAL LEDGERIntro: US Multinationals need a common language to view their exposure to foreigncurrency risk when they operate in numerous countries. They need a General Ledger thataggregates the transaction data of all their accounts in any country to gain a view of theiroverall exposure to currency risk.Body: US Multinationals cope with a variety of conventions in accounting oftransactions in their operations overseas. Each overseas operation also has its own policyfor hedging against currency risks. A global General Ledger provides an overall view ofcurrency risk exposure and prepares the ground for finding the most optimum means tohedge against it. Multinationals can reduce the costs of hedging by taking advantage ofnatural hedges inherent in the reverse movements of their transactions. Nair and Co hasthe expertise to develop a General Ledger that translates individual country Ledgers into aglobal General Ledger.
  3. 3. ACCOUNTS PAYABLEIntro: US Multinationals can centralize the management of payables to realize significantefficiencies and compliance benefits. Fewer cross-border transactions, with centralizedpayables management, will reduce transaction costs incurred on banking charges andcurrency conversion. Centralized management of payments can also lower cost ofholding cash reserves.Body: Multinationals should centralize their payables management to cut costs in cross-border transactions. The frequency of cross-border transactions can be reduced bynetting payments between subsidiaries. Multinationals can also reduce the costs offinancial services as fewer banks manage payables from a single point. A global view ofpayables data helps to determine the optimal policies for payment terms for each supplier.Compliance can be improved by using the cash reserves of the entire enterprise, insteadof anyone unit of the company, to meet possible shortfalls in any one unit. Nair and Coassists in building systems of centralized management of payables and identifying theattendant efficiencies. ACCOUNTS RECEIVABLESIntro: Multinationals should manage their Accounts Receivables (AR) from a central point withIFRS compliant consolidated data. Any material weakness due to delays in payment and theirimpact for the entire enterprise is most likely to be detected from a central point.Body: Multinationals have their local subsidiaries manage accounts receivables; the paymentterms reflect customer relationship practices in each region. Technological changes, such aselectronic invoicing and integrated software systems, as well s regulatory improvements such asa common clearinghouse for all countries in Europe enable greater centralization in themanagement of receivables. Centralization of data for all accounts receivables enablescompanies to prepare reports and compare payment terms to their customers. Nair and companyoffer the knowledge to standardize information for centralized management of accountsreceivables. EXPENSE PROCESSINGIntro: Multinationals can centralize and automate expense processing to reduce costs ofmanual processing and fraud. A global view of the data also helps to optimize expense
  4. 4. management. Local variations in regulations and practices for access to data as well as ITsystems complicate the task of automation of expense management.Body: Multinational card programs, when they are integrated with expense processingsoftware, can help to eliminate manual expense processing, eliminate fraud and integratethe data flowing from merchants. Multinationals can use reporting based on theconsolidated data to find opportunities for striking deals with airlines and hotelcompanies. They can also reduce their costs of currency conversion and banking charges.The practical challenges of implementing such systems are access to data frommerchants who are bound by local laws and organizational practices. Nair and Co assistsits clients finding ways to deal with the regulatory environment for transaction data accessin each country and to integrate it with their ERP systems. FUNDS TRANSFERSIntro: Multinationals want to pool their account balances worldwide to minimize the costs ofshort-term borrowing and to maximize the returns from short-term investments. Automatedtransfers of funds help to aggregate them at a central point and to manage them optimally.Body: Local subsidiaries of multinationals typically maintain their account balances with localbanks. When cash is short, they incur costs of an overdraft with their bank. Similarly, they don’tearn enough from their cash surpluses when they lie idle or are kept idle for precautionaryreasons. When multinationals pool their worldwide account balances, the costs of each subsidiaryare minimized and returns maximized as lower amounts are kept idle for precautionary reasons.Liberalization of capital movements enables rapid transfers of cash from one country to another.Nair and Co can assist in building systems for centralization of account balances with automatedfunds transfers. MONTH-END FINANCIALSIntro: Multinationals need more frequent reporting of their accounts to cope with their short-term risks. Volatility in short-term exchange rates, interest rates, asset prices has an impact ontheir operating cash flow and the ability to manage business operations. The accurate reporting ofshort-term financials with short lead time poses a significant challenge.Body: Multinationals need month-end financials to gain visibility to their short-term risks. Theycan manage their short-term risks with the use of hedging instruments. These instruments arebought for short periods of time. Treasury managers need to assess the cost of buying hedginginstruments versus the benefit in terms of lower risk every month. Nair and Co brings theknowledge of the best practices for rapidly preparing financial accounts every month.
  5. 5. INTERNATIONAL CONSOLIDATINGIntro: Multinationals need a global view of their financial position. Internal transactions withinthe enterprise and financial reporting in a variety of currencies cloud the global view of the stateof finances of multinationals.Body: Multinationals are expected to report their global financial position in order to comply withIFRS. A global financial statement also lends itself to analysis for the purpose of optimization. Thehigh incidence of transactions within the multinational enterprise complicates the task ofpreparing a single financial statement for the entire multinational corporation. IFRS expectsmultinationals to prepare financial statements for each of the business segments of the company.Since multinational companies execute bulk transactions for a number of their businesssegments, accountants face a challenging task of assigning revenues and costs to each businesssegment. Regulatory bodies also expect that a well defined audit trail exists to justify theaccounting policies. Nair and Co brings knowledge of the best practices to adapt to a new era ofaccounting that is global and amenable to analysis. INTERNAL AUDITIntro: US Multinationals view Internal Audit as a means to manage risk worldwide. Non-financial risks originating overseas are more likely to impact them than financial anddomestic risks. Global consulting companies can assist in building the informationinfrastructure to manage enterprise risks.Body: Multinationals increasingly want their Internal Auditors to ensure that internalcontrol systems detect an adverse event and contain its effects before extensive damageis inflicted. Internal Auditors periodically inspect internal control systems to ensure thatadequate defenses have been built. Increasingly, global supply chains are affected byevents in distant places which cascade throughout the enterprise. A global view of theenterprise helps to detect vulnerabilities and the possible ripple effects of an event.Internal Auditors can use analytics software to find patterns in data that can help toanticipate adverse events and their impact. They also need knowledge of local business,regulations and laws to understand the data in a perspective. Nair and Co can assist inpreparing a framework for data mining required to understand, anticipate and mitigaterisks. STATUTORY ACCOUNTSIntro: Multinationals contend with a diversity of national laws for statutory accounts. Theselaws reflect differences in tax laws, contracts, accounting of retirement benefits and employment
  6. 6. law. Global consulting companies help in reconciling national standards for statutory accountsand financial reporting at the global level.Body: Multinationals will deal with the costly business of complying with international accountingstandards for global reporting and national laws that influence statutory accounts. Enforcement oftax laws and contracts remain national. The politics of each country affects the choices eachcountry makes for retirement security as well as employment security. Accounting treatment ofindividual items will vary depending on the national laws of each country. Nair and Company hasthe unique skill to deal with the conflicting and shifting demands of national and international lawsgoverning accounting.

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