This article gives a brief overview of the goals and duties of financial management. Also, it shows how market value, financial decisions, and the trade-off between risk and reward are all connected. The job of the finance manager is to increase the value of the company to its shareholders. To do this, he or she must find ways to reduce risk while increasing return. It is important to keep track of how much money comes in and goes out to make sure that your investments are safe and being used well. In this article, we will discuss about functions of international financial management in brief with examples for your better understanding.
The role of managing money has changed over time. Before the middle of the 20th century, it was only used to raise money for important events in a company’s history, like the launch of a new product, a big expansion, a merger, etc. Modern financial management includes more than just getting money. It also involves deciding whether or not to make an investment, get financing, or share earnings.
Functions of International Financial Management
The money must come from many different places. When making a choice, the importance of the sources will be taken into account. Having access to capital is only half the battle. The real action happens when that capital is put to good use. When someone gives you money, you have to give it back. If you use it wisely, the payoff is easy, but if you don’t, it’s hard. The team in charge should have a plan for how to spend the money well. It may be easy to borrow money, but it may be hard to pay it back. Read on to learn more about functions of international financial management and become the subject matter expert on it.
Getting money is the first step in making any kind of investment. The international finance function can show businesses around the world how to take advantage of the many changes in the global financial market. It looks at swaps as a way to lower the cost of capital and how different instruments can be used to get money from investors. IFM includes both exposure to and management of interest rates.
Working Capital Decisions
One of the primary functions of international financial management is to facilitate international trade and investment. When a company first starts to grow internationally, it looks into different ways to get working capital so that it can get a loan with the lowest possible interest rate.
An MNC can access the global financial market and move money between its different branches more easily than a domestic company can. Working capital is important for any business to run smoothly, and international finance can help you figure out how much you need and how to manage it best. It also talks about how international trade deals are made.
Finance Choices for Businesses
The debt-to-equity ratio for a given level of equity is also a very important part of international finance. Because interest payments and debt give the company leverage and tax breaks, it would want as much debt as possible. But debt increases risk, so leverage and debt risk are not the same thing. When running a business, the management must decide how much of each type of financing to use.
Structure of debt, including short-, medium-, and long-term obligations, as well as secured and unsecured debt. Instead of floating, it should be decided what currency or currencies should be used to take on debt, as well as the maturity and terms of the debt, and so on. The company’s debt, cash on hand, and other things should stay the same.
The business should never have too much or too little debt. The loan should bring in enough money to pay for itself. It must be in the same currency as the money that comes in from exports. It makes sense to take on debt in currencies that are likely to lose value.
Debt Crisis Effects Banks
In the 1980s, governments’ failure to repay loans harmed international financial institutions. Banks couldn’t force financial corporations into liquidation via multinational loans, so payments were rescheduled or written off. The banking sector suffered but didn’t collapse, and banks now only lend to market-based economies undergoing reforms.
The International Debt Market’s growth led to new instruments and secondary markets for various debts. International finance emphasizes using capital, earning foreign exchange, and repaying debt. A key functions of international financial management is to ensure the efficient allocation of financial resources across borders.
Capital Structure Decisions
The cost of capital, the rate of return, and the value to shareholders are all affected by the capital structure. Important things to think about include the debt’s maturity, interest rate, currency, and how it will be paid back. Debt risk hedging is a smart move because it makes it less likely that there will be financial stress or even a crisis.
Businesses should set up their debt so that it matches the payment and characteristics of the assets they make. This will make it less likely that they will have money problems. If a company can do better than the market, it should deviate from the maximum risk debt composition.
In international finance, the best debt-to-equity ratio is crucial. Companies aim for high debt for tax breaks and leverage, but this also increases risk. Management must consider equity-to-debt ratio, debt type, maturity, terms, security, currency, and cash flow.
The loan should pay for itself and match the currency of export earnings. It’s wise to borrow in currencies expected to depreciate. While leveraging debt can increase shareholder value, hedging is necessary to reduce risk. A company should avoid excess or insufficient debt.
When a company develops a niche technology, puts it on the market, and sees success abroad, or when it wants to take advantage of geographic advantages in another country, it sets up a wholly owned subsidiary there. One only considers foreign investment and production when the net present value of cash flows is positive, regardless of the reason for the investment or production.
Because of this, the field of international finance looks at different theories of production overseas, how to make decisions about investment capital budgeting, and how to evaluate the foreign exchange and political risks that come with investing overseas.
Accounting and Taxation Decisions
International accounting is necessary for IFM. Experts discuss international auditing, financial reporting, and taxation. Transfer pricing, which reduces the tax and tariff burden and manages working capital, is a crucial aspect of international accounting.
In the same way, the international tax system shouldn’t slow down economic growth or hurt international trade. A key functions of international financial management is to develop and implement strategic financial plans that align with organizational goals and objectives.
Frequently Asked Questions
Who was the First Person to Manage Money?
The Theory of Portfolio Management by Harry Markowitz in 1952, the Theory of Leverage and Company Valuation by Modigliani and Miller in 1958, and the Option Valuation Model by Black and Scholes in the 1970s were all important steps in the development of modern financial management.
What are the Challenges of International Financial Management?
However, increased liquidity entails risks such as the accumulation of increasingly unsustainable debts, lack of transparency in financial transactions and products, tax evasion, systemic failure risks due to actor interdependence, and the instability of some emerging nations.
What Kinds of Chances are there for Managing Money?
In the banking business, there are many opportunities both on and off Wall Street. Financial planning, financial analysis, actuarial science, trading, portfolio management, and quantitative analysis are all possible careers in finance (quant).
Financial managers can boost earnings and keep the company afloat by determining the best mix of long-term investments and short-term financing for the company’s assets by applying general management principles to the firm’s financial resources. Even though the idea and goals of international financial management haven’t changed, the field’s scope and pace have. International finance management is in charge of money decisions, investments, and dividends.
Even though we only talk about financial management briefly here, it is a long-term process that requires a lot of planning. There are a few things that set international financial management apart. Unlike when you deal with money. In this post, we’ll examine the functions of international financial management and grab extensive knowledge on the topics. To understand more about features of international financial management, read beyond what seems evident.