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17/04/2018 08:21:35 PM

Budgeting in Multinational Companies

Budgeting in Multinational Companies

Budgets play an important role for organizations of all sizes and forms. For example, budgets are used in managing the operations of government agencies, churches, hospitals, and other nonprofit rganizations. Individuals and families also use budgeting in managing their financial affairs.

Budgeting involves (1) establishing specific goals, (2) executing plans to achieve the goals, and (3) periodically comparing actual results with the goals.

Multinational companies have operations in many countries. An international presence carries with it positives—access to new markets and resources—and negatives—operating in less-familiar business environments and exposure to currency fluctuations. For example, multinational companies earn revenues and incur expenses in many different currencies, and they must translate their operating performance into a single currency for reporting results to their shareholders each quarter. This translation is based on the average exchange rates that prevail during the quarter.

That is, in addition to budgeting in different currencies, management accountants in multinational companies also need to budget for foreign exchange rates. This is difficult because management accountants need to anticipate potential changes that might take place during the year. Exchange rates are constantly fluctuating, so to reduce the possible negative impact on performance caused by unfavorable exchange rate movements, finance managers will frequently use sophisticated techniques such as forward, future, and option contracts to minimize exposure to foreign currency fluctuations. Besides currency issues, multinational companies need to understand the political, legal, and, in particular, economic environments of the different countries in which they operate.

Multinational companies find budgeting to be a valuable tool when operating in very uncertain environments. As circumstances and conditions change, companies revise their budgets. The purpose of budgeting in such environments is not to evaluate performance relative to budgets, which is a meaningless comparison when conditions are so volatile, but to help managers throughout the organization to learn and to adapt their plans to the changing conditions and to communicate and coordinate the actions that need to be taken throughout the company. Senior managers evaluate performance more subjectively, based on how well subordinate managers have managed in these uncertain environments.

Developing an annual budget usually begins several months prior to the end of the current year. This responsibility is normally assigned to a budget committee. Such a committee often consists of the budget director, the controller, the treasurer, the production manager, and the sales manager. The budget process is monitored and summarized by the Accounting Department, which reports to the committee.