What is International Financial Management?
Financial Management is the branch of management that takes care of the financial resources and aspects of a company. The managers plan, organize, direct and finally control the activities that relate to the sourcing of funds for the company and its utilization or investment with a two pronged aims – reduction of costs and optimization of resources leading to maximization of profits. The main goals of international Financial Management include ensuring an uninterrupted supply of funds for the business activities of the organization and its optimum utilization so as to generate the highest possible returns for the business.
The management has to decide about the important questions that pertain to the sourcing of funds- what are the available sources of funds, time period of funding, cost of funds, and finally how much returns will the company be able to generate out of those funds. Also, they have to decide where to invest these funds and what are the fixed assets requirements of the company. They also need to perform the important function of working capital management with those funds.
- What is International Financial Management?
- What are the Goals of International Financial Management?
After the sourcing of funds and its investment decisions, the management has to take important decisions with regard to dividend payments out of the earnings of the company. They have to decide how much they will give away to the shareholders in the form of dividends. The balance portion will be the retained profits that will be essential and available for the growth and expansion of the organization.
What are the Goals of International Financial Management?
We will divide the goals of International Financial Management into two categories: Basic Goals and Secondary Goals.
Wealth Maximization of Shareholders
Wealth maximization of shareholders is one of the most important goals of international financial management. It is a long-term goal that a company cannot achieve just in a few days or even months. A company can achieve this objective by an excellent overall performance consistently year on year. By this, we mean that the managers should manage the funds such that it is always adequate as per the requirement of the company. Separate budgets for separate functions within the organization need to be made and implemented. Working capital management should be effective, production and other allied activities should go on uninterrupted and employee welfare should also be a priority.
Effective and efficient management of the firm’s resources along with good investment decisions will result in achieving high standards in the organization. This will lead to an increase in revenue with higher profits. This will in turn maximize the wealth of the shareholders by higher value generation, increasing the stock price as well as higher dividends payout.
International financial management aims to maximize the profits of the organization by making correct investment decisions. It promotes investments that are safe and will generate good returns. Also, the utilization of funds should be such that the activities of the company go on without interruption. This will result in an increase in turnover and thus, profits.
Optimum Rate of Interest
International financial management aims to achieve an optimum rate of interest on the funds that a company borrows. The managers should check and compare all the possible options of finance that a company has. They should choose the source that is reliable, safe, and with the least possible rate of interest. Lower interest or lower financing costs will boost the profits in turn.
Foreign Exchange Risk Management
As we all know foreign exchange risk is an essential and important part of international trade. Hence, managers have no choice but to manage foreign exchange rate risk timely and effectively. Exchange rates are volatile and unpredictable. They can result in gains as well as heavy losses in case they are not favorable for the company. Hence, the managers should adequately consider, cover, and hedge against foreign exchange risk while doing international trade.
Political Risk Management
Effective political risk management is one of the important goals of international financial management. The management should take into account cases of political unrest or instability in countries before they invest there. Political risk can arise in the domestic market too, and hence they should be cautious about it.
Changes in laws and policies of the government, or a change in the government itself can create trouble for any company. They may face cancellations of projects or hindrances, red-tapism, and delays that may cause significant monetary losses to the company. Hence, the managers should always take political risk into consideration while investing in any project, especially if it is for the long term.
Effectively Use Expanded Sets of Opportunities
International financial management aims to make the best possible use of opportunities that arise from investing in different countries. Interest rates and the cost of capital can be very low in some countries. Or labor can be inexpensive in some other country. Some foreign markets may have the extra potential for a particular line of product. The managers should be dynamic and flexible in this fast-changing business environment. They should immediately make use of any of such opportunities that may arise and result in monetary benefits for the company.
Proper Tax Planning
International financial management aims to promote tax planning in the best possible way. Different countries have different tax slabs, liabilities, and exemptions. Managers should be efficient enough to study in detail the taxation policies of all of the countries wherever they operate.
The management should avoid any wastage of resources on account of inefficient tax planning. Maximum possible reduction in tax liabilities needs to be done by making use of government tax exemptions, rebates, or any other benefits that are available.
Effective Inflation Risk Management
Another goal of international financial management is to effectively manage the inflation risk that may arise in different countries at different times. Inflation or the continuous rise in prices of inputs can cause a major financial strain on any company. The output price or the selling price may not increase immediately due to market constraints, resulting in lower profits or even losses.
Managers need to properly plan and budget for inflation risk by properly studying the economic environments of countries where they operate. This will help them to get their costing and pricing right and minimize instances of losses for the company.
Maximization of Shareholder Value
International financial management aims to maximize shareholder value by ensuring the maximum possible dividend payout. This can happen by ensuring that the company performs well. The managers have to manage the company’s finances in the most effective and efficient manner so as to increase the net profits of the company.
They may retain a smaller portion of profits for investment or expansion purposes. They can decide to postpone heavy capital expenditures for some time and give a higher dividend payout. This will maximize the satisfaction of the equity shareholders. Also, a good and consistent dividend payout helps in attracting more funds by way of fresh investment in equity shares of the company in the long run. This will create a great credentials and goodwill for the company amongst the investors. This will lead to more demand of shares and thus the equity would start commanding a premium. This in turn would increase the investment value, further issues can be at a substantial premium leading to easy availability of funds at very low cost and so on.