international financial management business

international financial management

1. Unit 1

2. International Financial Management International financial management, also known as international finance, is a well-known term in today’s world. It simply means financial management in an international business environment. It is different from financial management because of the different factors involved like currency, political situations, imperfect markets, and diversified opportunity sets.

3. Objectives of IFM Acquisition of Funds This objective involves generating funds from internal as well as external sources. The goal of international financial management is to acquire funds at the lowest possible cost. Investment Decisions International financial management is concerned with the investment of acquired funds in an optimum manner in order to maximize shareholders’ as well as stakeholders’ wealth.

4. Scope of International Financial Management Investment Decision Evaluating the risk involved, measuring the cost of fund and estimating expected benefits from a project comes under  investment  decision. It is one of the important scope of financial management. The two major components of investment decision are – Capital budgeting and Working capital.

5. Capital Budgeting Capital budgeting is commonly known as the investment appraisal. It deals with the allocation of capital and funds in such a manner that they will yield earnings in future. Capital budgeting determines the  long term investment  which includes replacement and renovation of old assets.

6. Working Capital Decisions related to  working capital  is another crucial scope of financial management. Decisions involving around working capital and short term financing are known as working capital decision. It also manages the relationship between short term assets and its  liabilities .

7. Dividend Decision The Dividend Decision plays a crucial role in today’s corporate era. It determines the amount of taxation that stockholders pay. A good dividend policy helps to achieve the objective of wealth maximization. Distributing the entire profit in the form of dividends or distributing only a certain percentage of it is decided by dividend policy.

8. Financing Decision Financing Decisions focuses on the accountabilities and stockholders’ equity side of the firm’s  balance sheet , for example decision to issue  bonds  is a kind of financing decision. The main aim of financing decision is to cover expenses and investments. The decision involves generating capitals by various methods, from different sources, in relative proportion and considering opportunity costs, with respect to time of flotation of securities, etc.

9. Nature of Financial Management Primary nature of financial management focus towards valuation of company. That is the reason where all the financial decisions is directly linked with optimizing / maximization the value of a company. Nature of financial management basically involves decision where risk and return are linked with investment. Generally high risk investment yield high returns on investments. So, role of financial manager is to effectively calculate the level of risk company is involve and take the appropriate decision which can satisfy shareholders, investors or founder of the company.

10.  Finance is a foundation of economic activities. The person who Manages finance is called as financial manager. Important role of financial manager is to control finance and implement the plans. For any company financial manager plays a crucial role in it. Many times it happens that lack of skills or wrong decisions can lead to heavy losses to an organization. Financial Management is an important function in company’s management. Financial factors are considered in all the company’s decisions and all the departments of an organization. It affects success, growth and volatility of a company. Finance is said to end up being the lifeline of a business.

11. Finance management is one of the important education which has been realized word wide. Now a day’s people are undergoing through various specialization courses of financial management. Many people have chosen financial management as their profession. The nature of financial management is never a separate entity. Even as an operational manager or functional manager one has to take responsibility of financial management.

12. Nature of financial management is multi-disciplinary. Financial management depends upon various other factors like: accounting, banking, inflation, economy, etc. for the better utilization of finances. Approach of financial management is not limited to business functions but it is a backbone of commerce, economic and industry.

13. Importance of International Financial Management International finance plays a critical role in international trade and inter-economy exchange of goods and services. It is important for a number of reasons, the most notable ones are listed here − International finance is an important tool to find the exchange rates, compare inflation rates, get an idea about investing in international debt securities, ascertain the economic status of other countries and judge the foreign markets. Exchange rates are very important in international finance, as they let us determine the relative values of currencies. International finance helps in calculating these rates.

14. Various economic factors help in making international investment decisions. Economic factors of economies help in determining whether or not investors’ money is safe with foreign debt securities. An international finance system maintains peace among the nations. Without a solid finance measure, all nations would work for their self-interest. International finance helps in keeping that issue at bay. International finance organizations, such as IMF, the World Bank, etc., provide a mediators’ role in managing international finance disputes.

15. D ifferences between domestic finance and international finance  Domestic finance The currency exposure has no impact. It is exposed to same economic and political environments. It is exposed to same tax laws and regulations. Stakeholders are of same beliefs, languages etc. Knowledge of foreign exchange derivatives is not required. Challenges are limited. Maintenance of separate books are not required.

16. International finance The currency exposure has impact. It is exposed to different economic and political environments. It is exposed to different tax laws and regulations. Stakeholders are of different beliefs, languages etc. Knowledge of foreign exchange derivatives are required. Challenges are limitless. Maintenance of separate books are required as per GAAP/AS.

17. International Flow of Funds The international flow of funds takes place when the transactions of buying and selling take place between the international market by means of international business that is export and import from one country to another country. The transactions of international business cause the flow of funds from one country to another which facilitates imports and exports from one country to another and helps into money to flow from one to another market. The financial managers of many multinational corporations keep an eye on the changing trends of the flow of international business transactions which is measured by the balance of payment in a country.

18. Balance of Payments The balance of payment shows the value of all the transactions that took place between the domestic and the foreign residents in a specific period of time. All of these transactions are recorded in double entry system of accounting and each transaction has two sides one is debt and the other is credit. So, in the balance of payment is the aggregate of both the transactions. The balance of payment can be in surplus or in deficit within a specific period of time.

19. When the export transactions are more than the import transactions in a given specific period of time it is said as the surplus balance of payment . On the other hand, when the export transactions are less than the import transactions of the country in a given specific period of time it is said as deficit balance of payment . The current and capital account are the two components of the balance of payment.

20. Current Account   The short term transactions of a country and the difference between the savings and the deposits aggregately constitutes the current account of the balance of payment. The transactions in the current account consist of export and import transactions of goods, export and import transactions of the services, money transfers and income from the factors like land and foreign shares. The total of the current account balance is also stated as the balance of trade as a subpart of the balance of payment.

21. Capital Account   The sum of total inflow and outflow of capital that directly affect a nation’s foreign assets and liabilities is aggregate constitutes a capital account. It includes all the trade transactions of international business between one country or a nation or the other country or nation. The investments and loans of foreign countries, banking and other forms of foreign capital and any changes in the foreign reserves all these items are included in the capital account of the balance of payment.

22. F actors that influence the flow of International funds  Impact of Inflation National Income Government policies of a country   Subsidies provided for traders   Restriction on imports Restrictions on the piracy   I mpact of exchange rates of foreign currency

23. Advantages of International Flow of Funds Increased Production Capacity Increase Aggregate Demand   Technological Advancement The surplus on the financial account of the balance of payment   Easy Finances   The inflow of Foreign Currencies  

24. Disadvantages of International Flow of Funds The loss to Domestic Players Tax Evasion Destroying the real estate market Money Laundering

25. International Trade Flow International trade  is the exchange of  capital ,  goods , and  services  across  international borders  or territories because there is a need or want of goods or services. In most countries, such  trade  represents a significant share of  gross domestic product  (GDP). While international trade has existed throughout history (for example  Uttarapatha ,  Silk Road ,  Amber Road ,  scramble for Africa ,  Atlantic slave trade ,  salt roads ), its economic, social, and political importance has been on the rise in recent centuries

26. Carrying out trade at an international level is a complex process when compared to  domestic trade . When trade takes place between two or more  states  factors like currency, government policies, economy, judicial system, laws, and markets influence trade.

27. Characteristics of International Trade Flow A  product  that is transferred or sold from a party in one country to a party in another country is an  export  from the originating country, and an  import  to the country receiving that product. Imports and exports are accounted for in a country's current account in the  balance of payments . Trading globally may give  consumers  and countries the opportunity to be exposed to new  markets  and products.

28. Almost every kind of product can be found in the  international market , for example: food, clothes, spare parts, oil, jewellery , wine, stocks, currencies, and water. Services are also traded, such as in  tourism ,  banking ,  consulting , and  transportation Advanced  technology  (including  transportation ),  globalization ,  industrialization ,  outsourcing  and  multinational corporations  have major impacts on the international trade  system .

29. Most traded export products

30. International Capital Flow Traditionally the capital movements were considered important as they assisted in the maintenance of BOP equilibrium. A country, having a BOP surplus, will invest or lend capital abroad and thereby offset the payments surplus. On the opposite, given a BOP deficit, it could borrow capital from abroad and remove the deficit. In other words, the capital movements had the specific role in balancing the international payments and receipts. In the context of LDC’s like India, the international capital flows or foreign aid have much vital role to play.

31. The international capital assistance may be in the form of private and public foreign investments, loans from foreign nationals, business and financial institutions, central banks, governments and international economic institutions such as International Monetary Fund (IMF), International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), International Development Association (IDA) and several other agencies.

32. Benefits of International Capital Flows Increase in the Rates of Saving and Investment Technological Change Creation of Economic and Social Overheads Development of Heavy and Basic Industries Undertaking of Initial Risk Check upon Inflationary Pressures Creation of Employment Opportunities Beneficial for Labour Modern Value System

33. Demerits of International Capital Flows Not Indispensable Wasteful Use of Foreign Capital No Increase in Net Investment Increase in External Debt Burden Balance of Payments Problem  Financing of Uneconomic Activities Unsuited Technology Adverse Effect on Domestic Saving Political Domination

34. Contemporary issues in International Financial Management Challenge of Protection of Natural Resources When there is more international finance, its growth will affect the natural resources.  Terrorism Terrorism is also main challenge of International Finance. If any country will increase the terrorism in other country, its international finance will affected. Motherland is first and then, there is any international finance. India should ban all international finance and business relating to the countries  which are promoting  terrorism in India. Other countries which have the problem of terrorism, should strict ban on it if it has to increase its international finance with other countries.

35. Culture I nternational finance has also challenge of culture of each country. India is veg. country. So, McDonnell and other non-veg. country should ban to produce the non-veg. in India. Follow the Political Policies and Law of Nation If business people have to grow international finance in any country, they have to make their policy according to the law and political policy of same country.

36. International Currencies International finance also affects from international currencies. You have some foreign currency if you have to deal with foreign country. At the time of dealing, you know what is the current market rate of forex. If your own currency is low value, you should wait for business, otherwise, your own capital will decrease at fast rate.