Basic Problems In International Financial Management

The problems of financial management of the multinational organizations are slightly more complex than those of domestic organizations.  Of course, the basic concepts of efficient allocation of funds among assets and the raising of funds on most favourable terms are the same, both for domestic firm and multinational enterprises.  A finance manager of a multinational firm has to devote his attention to two basic problems besides the problems which a finance manager of a multinational company has to face.  These problems are as follows:

• Foreign Exchange Fluctuations:

When an organization trades in many countries, the transactions necessarily involve currency of those countries.  Foreign exchange fluctuation is the risk due to relative rise or fall of value of one currency with respect to another.  The fall in value or devaluation may affect future sales, costs and remittances.  Thus, the international trade involves foreign exchange rate risk i.e. the risk relating to the uncertainty attached to the exchange rates between two countries.  For instance, if the foreign currency becomes stronger as compared to Indian rupees, the Indian buyer/borrower has to repay the loan in terms of more rupees than the rupees he obtained by way of loan.  The extra payment is not due to any increase in the interest rate but because of unfavourable exchange rate.  Conversely, the Indian buyer will stand to gain if the Indian rupee becomes stronger.  Hence, in a multi-national company, the management of foreign exchange rate risk becomes an important area to be managed by the finance manager.

• Financing Facilities:

Another major area of concern for the finance manager is raising funds on as favourable terms as possible.  The funds can be raised either from an internal source or from an external source.  Normally both sources are tapped.  There are a number of leading agencies, which provide finance at reasonable rates to multinationals.