1.0 Introduction 1
2.0 The current financial practices of GHC 1
3.0 The issues in “Recent developments and opportunities” 3
3.1 The discussion with overseas Governments 3
3.2 The review of warehousing arrangements worldwide 3
4.0 The structure for assessing in country risks 4
5.0 The responsibilities of the Chief Accountant and the Treasurer 6
5.1 An split of Chief Accountant’s and the Treasurer’s responsibilities 7
5.2 The group treasurer’s responsibilities 7
5.3 The chief Accountant’s responsibilities 8
6.0 Conclusion 8
GHC’s sales revenue has gradually growth in these years. It is obvious that the GHC’s domestic market is gradually saturated, while its overseas market is intensively enlarged. Entering overseas markets is a significant and critical growth strategy of many organizations. It is imperative for GHC to identify risks associated with doing business in a foreign market. The financial managers should consider the exchange rate exposures and foreign investment risks before making investing decisions. In this paper, the author demonstrated the potential risks or shortcomings of the current financial practices in GHC. Some suggestions are also made in order to manage exchange rate risks and local currency problems. In section 3, the paper discussed two issues that GHC now faced in recent development, which are Foreign Direct Investment and worldwide warehousing arrangements. Moreover, the paper introduced a structure which allows GHC to assess in risks associated with any inward investment in a country in Section 4. Following is the proposition about a split of the Chief Accountant’s and the Group Treasurer’s responsibilities.
2.0 The current financial practices of GHC
It is GHC’s current practice to (1) pay its suppliers by British currency, (2) convert the sales revenues to British Pounds and (3) all costs and taxes are paid in Pounds in UK. As an international company, the assets and liabilities of GHC are held and sourced in a variety of currencies, such as British Pounds, US Dollars, AU Dollars and so on. This practice is intending to reduce the transaction risks which resulted from a currency rate fluctuation in a cross-border business. However, this local-currency pricing strategy is sometimes impossible to implement. Actually, the exchange rate risk is not eliminated by GHC’s practice, and it is merely transferred to the customers and suppliers (Paul & Samuel, 2007). For example, the GHC pay suppliers with its home currency of British pounds, so GHC has not to consider the exchange rate risk. Nevertheless, with the British Pounds increasing in value, the suppliers of Australia may be more likely to deal with its competitors because they would get less AU dollars. That is to say, the suppliers have to tolerate the exchange rate risk. It is sometimes uncompetitive for GHC in competing with local industries paying in the local currency in overseas. It is advisable for GHC to adopt the foreign currency forward technique to attract suppliers or customers to do business with it. Foreign currency forward allows GHC to buy or sell foreign currency at a fixed price in a fixed date. This method can limit the foreign exchange rates no matter how the exchange rate fluctuating.
In addition, the GHC’s sales revenues are converted into British Pounds in the Bank of UK as they are received. That is to say, the overseas transactions with be faced with highly risks when the single currency, British Pounds, fluctuates in certain times. As well, the single currency strategy is very inflexible in the overseas competing environment. As people can see, the sales revenue of North American is gradually increased from 17% to 19% in 2003-2007. Suppose the exchange rate in February was 1 GBP = 1.19962 USD, and in March is 1 GBP = 1.19943 USD. If sale revenue from US is paid in February to GHC, and GHC paid the shipping costs to an US company in March. Thus, the GHC may pay more money for the costs. The practice has only considered the GHC’s liquidity in the short-term while not considering its impact on the entire business operations in the long range.
It is suggested for GHC to adopt the finance diversification strategy to reduce economic risks resulting from exchange rate fluctuation. It means investing in a variety of assets in different countries to reduce risk. For example, if the Euro devaluated in certain time, the lost may be offset by revaluation of US dollars. The financial diversification will split up its economic risks into different constituents, or different countries (Qiu, 2007). It is advisable for GHC to transact with local currency of the main and stable markets, such as Western Europe and North America. An appropriate proportion of sales revenue is reserved in the local currency, so the costs of that countries can be paid in Euro or US dollars directly. In this case, the exchange rate risks can be reduced by matching long-term assets of the sales revenue and long-term costs in the host-country currency (Soenen, 1978).
3.0 The issues in “Recent developments and opportunities”
3.1 The discussion with overseas Governments
Governments of individual supplier countries anticipate GHC to (1) source the majority of its hardwood from their country, and (2) establish manufacturing, processing and finishing facilities in those countries. In other words, the home governments expect GHC to import more their hardwoods, and give Foreign Direct Investment to these countries. This investment requires GHC to plunge its capital, technologies and management skills into the host countries (Moosa, 2002). It also has to invest in buildings, machinery and equipment in there for future development. The receiving countries will get benefits from creation of new jobs and increment in income in the long term.
In return, GHC will receive cheaper production facilities, new markets and marketing channels in these countries. As people can see, one problem that GHC faced is that the customer service is poor in North America and Australia/New Zealand markets because of the long distances. If several branches are established in Asia and South America, the distances between the manufacturing places and markets will be highly decreased. Moreover, GHC could request some benefits from the host governments, such as:
Tariff preference treatment – which will allow GHC to pay less Tariff to the host government when exporting the products to overseas.
Special tax treatment – which will allow GHC to pay less tax for its sales revenues to the host countries.
Subsidies – the host government will provide extra subsidies if GHC invests in there.
Grants – the host government support GHC to establish its subsidiary with a low lending rate.
3.2 The review of warehousing arrangements worldwide
The overseas warehouses, especially in the North America and Australia/New Zealand, are providing poor quality service to their customers. There are mainly two reasons that why this phenomenon happens. There is no agency in these countries, and these warehouses staffs’ roles are just transshipping and delivering GHC’s products. As a result, the overseas warehouse may have no incentive to improve their services quality, because such performances are not intensively related with their salaries or income. On the other hand, because of the long distance between UK and overseas markets, there is lack of control in these warehouses. It is impossible for managers to give precise directions to the overseas staffs for the sake of limit of communications. As a result, the overseas warehouse can not provide high quality services as the GHC expected.
As discussed in section 3.1, it is advisable for GHC to establish the South American and Asian subsidiaries. If so, the manufacturing cost and shipping cost can be highly decreased, as well the warehouses in North American and Australia/New Zealand can controlled and guided by those subsidiaries. Moreover, it is considerable to establish the Agency system in those countries. In this way, GHC will be disentangled from the troublesome warehousing arrangement and management. The only role of GHC is to providing the products to the agencies, and agencies will reserve the products with their own warehouse. In order to get more sales revenues, the agencies will strive to promote GHC’s products to customers instead of GHC itself.
4.0 The structure for assessing in country risks
It is imperative for the international company to consider the political stability and property rights of the host country before inward investment. Some countries are suitable for foreign investment, and some are not. As people can see, the host governments ask GHC to establish manufacturing, processing and finishing facilities in forms of Foreign Direct Investment. It is necessary for GHC to find a structure or tool for assessing in investment risks.
Bhalla (1983) devised a four-step process to measure political and economic risks of countries for foreign direct investment decision making. Firstly, create a foreign investment risk matrix (FIRM) to find out which countries have a stable political and economic environment. It briefly describes whether a country’s investment environment is economic acceptable and politic stable. The second step is to create a country risk profile with a detailed analysis of the business environment for those countries. This country risk profile is more detailed in considering political stability, social stability and economic stability. The third step is to create a risk analysis for each project for each country to find out whether the investment project in question is compatible with the host country’s economic and political environment. For example, the GHC has to consider political instability and acts of terrorism, as defined in step 1, if it anticipated running long-term business in Asia or South American. The last step is to devise a foreign investment risk audit to re-evaluate the environment to avoid future investment risk in that country. This ongoing process is aimed to enhance the foreign direct investment project’s viability by interacting with the environment. GHC would keep developing appropriate strategies to replace the existing strategies in order to adapt the changes in the environment.
This assessing structure considers two board categories of factors as figure 1 displayed, which are political risk indicators (60 percent) and Economic risk indicators (40 percent) (Bhalla, 1983; Madura, 2000). McGowan & Moeller (2005) extended to evaluate the political-risk indicators based the attitude of host government (35%), conflict (35%) and corruption (30%) in the host country. As well, economic risk indicators consist of GNI per capita (30%), GNI per capita (35%) and inflation rate (35%) in that country. Every factor will be scored and the each total country risk rating will be calculated according to the different weights. By this way, the GHC will get clear about the risks of the countries.
Figure 1 – McGowan & Moeller’s Country-Risk Rating Scheme
When bring a product or service into a new foreign market or expecting to source capabilities from abroad, it is significant for GHC to fully understand the risks associated with doing business in there (Beamish & Lupton, 2009). However, in most of time, the corporations can not analyze the country-risk in-house alone. It is advisable for multinational corporations, such as GHC, to purchase political and economic risk information from professional consultants. The most obvious method is to obtain country-risk evaluations that have been prepared by specialists (Maurice, 1996). Many authoritative country-risk evaluations, such as Euromoney, are very useful for GHC making decisions on foreign direct investment.
5.0 The responsibilities of the Chief Accountant and the Treasurer
In large corporations, there are many different managers specializing in the companies’ different finance aspects. As figure 2 demonstrated, in large corporations, the chief financial officer (CFO) is appointed to oversee the work of his subordinates, which are the Treasurer and the Chief Accountant (The controller). Actually, the treasurer and the Chief Accountant have different objectives and functions. The main job of the treasurer is to obtain and manage the group’s capital, while the Chief Accountant is responsible to ensure the money using efficiently. For small companies, the treasurer and the controller may be the same person. However, in large companies, the tow positions are hold by different financial experts because their responsibilities are different.
Figure 2- The financial managers in large companies (Broyles, 2003)
5.1 An split of Chief Accountant’s and the Treasurer’s responsibilities
In GHC, the Chief Accountant does not think it is necessary to appoint a Group Treasurer. However, as above demonstrating, the responsibilities of the Chief Accountant and the Treasurer are different. Although the Chief Accountant has overseen the company’s financial operations for a long time, it is still necessary to appoint a Group Treasurer to invest surplus funds and ensure enough financing to meet all contingencies. Therefore, it is reasonable to split the responsibilities between the Chief Accountant and the Group Treasurer.
5.2 The Group treasurer’s responsibilities
The treasurer is responsible for looking after the firm’s cash, raising new capital, and maintaining relationships with significant shareholders, such as banks, stockholders, and investors (Richard & Stewart, 2003). The treasurer has to make all corporation members know the organization’s financial condition. It is obligated for the treasure to prepare the financial planning and budgeting in consultation with the board. In addition, the treasurer is a signatory on the bank account who can sign cheques on behalf of the corporation. Thus, the treasurer has to keep a cash book recording payments into and out of the bank and a cash book recording small cash payment (Broyles, 2003). It is also the treasure’s responsibility to ensure sufficient liquid assets to pay the corporation’s current obligations. As well, the treasure is also responsible for the current exposures management. For example, during the transaction in overseas business, the treasurer has to take certain measures to reduce the exchange rate exposures.
5.3 The chief Accountant’s responsibilities
The chief Accountant, usually called the controller, is responsible for designing the whole accounting system of the business, updating the system with changes from tax laws and accounting rules, and governs reporting financial statements to outsider shareholders (John, 2008). Moreover, the controller is also responsible for designing internal reports to all the managers in the organization, including sales manager, procurement managers and so on. These managers will highly rely on the Chief Accountant’s reports to make decisions. As well, the controller has to devise accounting reports to the CEO and the board. The chief Accountant oversees cost control throughout the company and often participates in major product pricing and credit decisions (Broyles, 2003). As displayed in figure 2, this person also has to report all matter related with taxes to the CFO.
GHC is now determining to directly invest in some countries, such as Asia or South American countries. By this kind of foreign direct investment, GHC can export of the goods produced in the source country to those adjacent promoting markets (Moosa, 2002). GHC is expected to get more benefits from the host government. However, it is important to identify the potential risks on GHC’s business performance resulted from a country’s political and economic environment. A stable environment can ensure the GHC’s long-term development in these countries. In addition, the current financial practices would not eliminate the exchange rate exposures of GHC. To some extend, this inflexible financial strategy may put GHC into more serious challenges. It is suggested to split the responsibilities between the Chief Accountant and the Group Treasure. The treasurer is responsible to obtain and manage the group’s capital, and Chief Accountant ensures the money using efficiently. By this cooperation, the GHC can handle with the financial challenges in foreign investment more effectively.
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