Introduction:

One needs money to make money. Finance is the life-blood of business and there must be a
continuous flow of funds in and out of a business enterprise. Money makes the wheels of
business run smoothly. Sound plans efficient production system and excellent marketing network
are all troubled in the absence of an adequate and timely supply of funds.
Sound financial management is as important in business as production and marketing. A business
firm requires finance to commence its operations, to continue operations and for expansion or
growth. Finance is, therefore, an important operative function of business. A large business firm
has to raise funds from several sources and has to utilize those funds in alternative investment
opportunities. In order to ensure the most careful utilization of funds and to provide a reasonable
rate of return on the investment sound financial policies and programs are required. Unwise
financing can drive a business into bankruptcy just as easily as a poor product incompetent
marketing or high production costs.
On the other hand, adequate and economical financing can provide the firm a differential
advantage in the market place. The success of a business enterprise is largely determined by the
way its capital funds are raised utilized and disbursed. In the modern money-using economy the
importance of finance has increased further due to increasing scale of operations and capital
intensive techniques of production and distribution. In fact finance is the bright thread running
through all business activity. It influences and limits the activities of marketing, production, and
purchasing and personnel management. The success of a business is measured largely in
financial terms. The efficient organization and administration of the finance function is thus vital
to the successful functioning of every business enterprise.
Definitions:
“Financial management is the activity concerned with planning, raising, controlling and
administering of funds used in the business.” Guthman and Dougal
“Financial management is that area of business management devoted to a judicious use of
capital and a careful selection of the source of capital in order to enable a spending unit to
move in the direction of reaching the goals.” J.F. Brandley
“Financial management is the operational activity of a business that is responsible for
obtaining and effectively utilizing the funds necessary for efficient operations.” Massie

Meaning of Financial Management:

Financial Management means planning, organizing, directing and controlling the financial
activities such as procurement and utilization of funds of the enterprise. It means applying
general management principles to financial resources of the enterprise.
Financial decisions refer to decisions concerning financial matters to a business concern.
Decisions regarding magnitude of funds to be invested to enable a firm to accomplish its ultimate
goal, kind of assets to be acquired, pattern of capitalization, pattern of distribution of firm’s
income and similar other matters are included in financial decisions. These decisions are crucial
for the well-being of a firm because they determine the firm’s ability to obtain plant and
equipment when needed to carry the required amount of inventories and receivables, to avoid
burdensome fixed charges when profits and sales decline and to avoid losing control of the
company.

Types of Financial Decisions:

It is important that financial decisions take care of the shareholders ‘interests. Financial decision
of a company includes the following decision:
Investment Decisions: Managers need to decide on the amount of investment available out of the
existing finance, on a long-term and short-term basis. They are of two types:
 Long-term investment decisions or Capital Budgeting mean committing funds for a long
period of time like fixed assets. These decisions are permanent and usually include the
ones affecting to investing in a building and land acquiring new machinery or replacing
the old ones etc. These decisions determine the financial hunts and performance of a
business.
 Short-term investment decisions or Working Capital Management means committing
funds for a short period of time like current assets. These involve decisions pertaining to
the investment of funds in the inventory, cash, bank deposits, and other short-term
investments. They directly affect the liquidity and performance of the business.
Financial decisions: They relate to the raising of finance from various resources which will
depend upon decision on type of source, period of financing, cost of financing and the returns
thereby.
 Financial Planning: Decisions which relate to estimating the sources and application of
funds. It means pre-estimating financial needs of an organization to ensure the
availability of adequate finance. Objective of financial planning is to plan and ensure that
the funds are available as and when required.
 Capital Structure: Decisions which involve identifying sources of funds. They also
involve decisions with respect to choosing external sources like issuing shares bonds
borrowing from banks or internal sources like retained earnings for raising funds.
Dividend Decisions: Decisions related to the portion of profits that will be distributed as
dividend. Shareholders always demand a higher dividend while the management would want to
retain profits for business needs. So, this is a complex managerial decision.
What is a Multinational Corporation?
A multinational corporation (MNC) has facilities and other assets in at least one country other
than its home country. A multinational company generally has offices and/or factories in
different countries and a centralized head office where they coordinate global management.
These companies, also known as international, stateless, or transnational corporate organizations.
A multinational corporation is a company that operates in its home country as well as in other
countries around the world. It maintains a central office located in one country which coordinates
the management of all its other offices such as administrative branches or factories. It isn’t
enough to call a company that exports its products to more than one country a multinational
company. They need to maintain actual business operations in other countries and must make a
foreign direct investment there.
These companies operate worldwide and hence also known as global enterprises. The activities
are controlled and operated by the parent company worldwide. Products and services of MNCs
are sold around various countries which require global management. High turnover and many
assets, aggressive marketing are some of the features of Multinational Companies. Pepsi,
Uniliver, Toyota, Mobilink and KFC are some of the examples of MNCs in Pakistan. MNCs has
a powerful influence on the local economies.

Models of Multinational Corporations

The following are the different models of multinational corporations:
1. Centralized
In the centralized model, companies put up an executive headquarters in their home country and
then build various manufacturing plants and production facilities in other countries. Its most
important advantage is being able to avoid tariffs and import quotas and take advantage of lower
production costs.
2. Regional
The regionalized model states that a company keeps its headquarters in one country that
supervises a collection of offices that are located in other countries. Unlike the centralized
model, the regionalized model includes subsidiaries and affiliates that all report to the
headquarters.
3. Multinational
In the multinational model, a parent company operates in the home country and puts up
subsidiaries in different countries. The difference is that the subsidiaries and affiliates are more
independent in their operations.
Characteristics of a Multinational Corporation
The following are the common characteristics of multinational corporations:
1. Very high assets and turnover
To become a multinational corporation the business must be large and must own a huge amount
of assets both physical and financial. The company’s targets are high, and they are able to
generate substantial profits.
2. Network of branches
Multinational companies maintain production and marketing operations in different countries. In
each country the business may oversee multiple offices that function through several branches
and subsidiaries.
3. Control
In relation to the previous point, the management of offices in other countries is controlled by
one head office located in the home country. Therefore the source of command is found in the
home country.
4. Continued growth
Multinational corporations keep growing. Even as they operate in other countries they strive to
grow their economic size by constantly upgrading and by conducting mergers and acquisitions.
5. Sophisticated technology
When a company goes global, they need to make sure that their investment will grow
substantially. In order to achieve substantial growth they need to make use of capital-intensive
technology especially in their production and marketing activities.
6. Management by Professionals
Multinational companies aim to employ only the best managers those who are capable of
handling large amounts of funds using advanced technology managing workers and running a
huge business entity.
7. Forceful marketing and advertising
One of the most effective survival strategies of multinational corporations is spending a great
deal of money on marketing and advertising. This is how they are able to sell every product or
brand they make.
Role of MNCs Finance Managers:
1) Making Investment Decisions:
One of the crucial tasks of an international finance manager is to deploy resources in such a way
as to help the firm to accomplish its objectives. This calls for making prudent decisions regarding
total amount of assets to be held in the enterprise. An MNC finance manager’s major
responsibility is to identify and feat profitable opportunities for long-term investment because the
very survival of the firm depends on it. Capital budgeting technique can be extremely useful in
identifying potential opportunities and evaluating their economic viability.
For capital budgeting purpose critical inputs as net investment outlay and net incremental cash
benefits after tax are the main issues. A particular issue that arises in connection with a
multinational firm is that should net cash flows be considered from the viewpoint of project or
parent company. This question arises for the fact that cash flow generated by a foreign
investment project can differ substantially from the cash that will be received by the parent
company.
In a country with high inflation, remitted profits to the parent company will decrease as the host
country currency declines. Risk factor should also be given due consideration while making
investment in a project. An international finance manager should analyze risks arising out of
uncertainty of amount of gains available from the project was also due to various other factors
such as exchange control restrictions on remittances, political risk, differing tax system, sources
of funds, exchange rate fluctuations, ratio of inflation, that are likely to have a negative effect on
the firm’s value.
2) Managing Working Capital:
The management of multinational current assets and liabilities is another crucial responsibility of
the multinational financial manager. The optimal working capital management calls for:
 Maintaining adequate liquid resources to meet due obligations
 Managing the timing of the flow of financial resources by accelerating the cash inflows
and decelerating cash outflows
 Maintaining an optimum level of cash in order to minimize the idle balances
In addition to the above an international finance manager has to give serious consideration to
several other critical factors such as the availability of appropriate currency overall policy of the
firm and the exchange risk.
Another different dimension of international working capital management is the management of
working capital over a wide geographical base. In view of establishment of the firm’s financial
centers in different cities of the world, the finance manager must co-ordinate the operations of
these centers so as to avoid unnecessary costs of carrying idle funds or short-term borrowing, and
thus ensure optimal utilization of the firm’s financial resources. Management of working capital
in international area also necessitates smooth transfer of funds both within and outside the
company. At times, an MNC faces problem in transferring funds to the destination in time due to
fastening of government restrictions exchange controls and also due to political risks.
Taxation is yet another aspect which should receive attention of an international finance
manager. This is for the fact that taxation laws vary from country to country and frequent
changes in these laws have significant bearing on the working capital management of the firm.
One of the important goals of working capital management is to accelerate cash inflows and to
decelerate cash outflows. To the extent this objective can be accomplished the firm will have
higher investment income and lower borrowing costs.
Efficient utilization of cash, therefore, involves speeding of cash collections and delaying down
cash payments working capital management in an international firm also requires effective
management of the intra-company accounts. An international finance manager has to decide how
to overcome these and ensure availability of requisite funds at the desired place in time
3) Making Financing Decisions:
The decision to finance overseas operations is a very difficult decision in as much as it has to
consider a host of factors associated with multinational economic environment. Among these
crucial factors are governmental influence and direct interference in domestic capital markets,
joint government action of exchange rates, and on the transfer of domestic funds to off-shore
markets, wide diversity of both domestic and international capital markets, political tasks of asset
expropriation and the associated financing risks, differing tax systems across countries, and
governmental subsidiaries and penalties on sources of funds.
Euromarkets and International Equities Markets and of different currencies. The firm can get
their shares listed on these markets and raise the funds in different currencies. Listing in different
stock exchanges of the world could lead to a better diversification of risks because many stock
markets do not move in tandem. Foreign subsidiaries can also raise resources from the local
markets. The subsidiary can raise the funds from one or more other companies through joint
venture or consortium. The subsidiary can also sell its own stock in the local market. It could
involve either public or private sale of stock.
Debt financing is even more varied than equity financing.
First it can be raised from a much broader geographical base. Either the parent or the overseas
subsidiary may have access to debt markers in the home country, host country, third country
markets or Euromarkets. Secondly debt can be obtained from a wide variety of sources like
public markets, commercial banks, investment banks or private placements. Third debt financing
is also more variable than equity financing, since it can be for the long or short term. Thus, a
multinational firm may have many of financing options.
4) Controlling Financial Activities:
An MNC finance manager has to monitor the uses of funds committed in various business units
and for that matter lay down suitable control system with built-in system of responding to
inflation and exchange fluctuations.
The local manager is given the responsibility for all financing decisions and he/she is evaluated
in terms of the bottom line of the income statement or the responsibility for financing decisions
is placed at the parent level and the local manager is evaluated only in terms of operating profits.
A compromise between these two approaches also is found where the parent company or a
regional office works in an advisory capacity while the local manager has the full responsibility
for the final decisions.

Factors That Affect a Multinational Corporation

Multinational companies are a lot more common than they used to be. Due to the increase in
outsourcing and overseas manufacturing, many companies have factories, supply chains or call
centers around the world. Companies such as Disney and McDonald’s that connect with
consumer tastes in multiple nations can develop a global reach. Businesses that go multinational
have to deal with lots of issues that smaller businesses don't have to deal with.
Differing Accounting Practices:
American companies base their accounting on GAAP. Many other countries require businesses
to use the International Financial Reporting Standard (IFRS). The two sets of rules use similar
accounting terms, and a lot of the practices are identical. There are also some big differences
between them. The layout of financial statements and how report inventory costs. The details are
technical but they make for big differences. If a U.S. corporation has to provide financial
statements in countries that use IFRS it will need two sets of statements one GAAP and one
IFRS.
Regulations and Rules:
Regulations and rules vary widely from nation to nation. One of the reasons for the growth of
multinational companies is that they can locate operations in whatever nation offers the best
advantages. If a country imposes a tariff on imports making goods in-country gets around that. A
corporation that finds a countries labor or environmental regulations too strict can relocate
somewhere with more business friendly laws. Even within one country changes to things like tax
laws can complicate business plans. Multinational corporations have to watch laws everywhere
they operate.
Currency Conversion Questions:
The relationship between the dollar and the euro, the euro and the yen, the yen and the Pakistani
rupee is constantly changing. Monday, the dollar may be worth 155 rupees Tuesday it might
drop to 150. Multinationals have to watch currency fluctuations for the effect on current
operations and future plans.
Political Risk:
Another factor that firms may encounter in international finance is political risk. Political risk
ranges from the risk of loss from unexpected government actions or other events of a political
character such as acts of terrorism. The other country may seize assets of the company without
any reimbursements by utilizing their sovereign right, and some countries may restrict currency
remittances to the parent company. MNCs must assess the political risk not only in countries
where it is currently doing business but also where it expects to establish subsidiaries.
Tax and Legal system:
Tax and legal system varies from one country to another country and this leads to complexity in
their financial implications and hence give rise to tax and legal risks.
Language and cultural differences:

Different countries have unique heritages that shape values and influence the conduct of
business. Multinational corporations find that matters such as defining the appropriate goals of
the firm, attitudes towards risk, performance evaluation and compensation system, interaction
with employees and the ability to limit unprofitable. Operations vary dramatically from one to
another country.

Social factors:

Social factors such as education, awareness trends and status of people in the society affects the
consumer behavior to purchase various goods and services. Social environment and culture such
as customs, lifestyles and values differs from country to country which further directly impacts
the international business.

Legal factors:

Legal factors relate to the legal environment of the country in which firm operates. Different
laws prevail in different countries and international business firms have to abide by the laws of
each country. Laws relating to age and disability discrimination, wage rates, employment and
environment laws affects the working of business firms. Along with this, various international
lending agencies affects the legal culture and working policies of business firm.

Inflation:
Inflation rate differs from country to country. Higher inflation rates in few countries denote
inflation risks that affects the multinational organizations.