Budgeting in a global arena

Budgeting in a global arena

Nearly all international businesses that involve more than a few owners and/or employees, have their finance stemming from (= provenir de) the owners (shareholders).

Business financing take different forms:

• Direct cash investment to buy shares (in the ownership of the business) through the shareholders allowing past profit which belongs to them to be reinvested in the business

• Equity (= fonds propres)

• Loans from lenders (mainly banks) who earn interest on their loan

• Difference between lender and shareholder = lender gets interest and don’t own shares of the company, whereas shareholder gets dividends

• Suppliers of goods and services being prepared to supply on credit with payment occurring a month or so after the date of supply, usually on an interest-free basis.

In larger companies, the owners (shareholders) are not involved in the daily running of the business, instead they appoint a board of directors to manage the business on the behalf.

The board has 3 major tasks:

1. Setting the overall direction and strategy for the business
2. Monitoring and controlling the activities of the business
3. Communicating with shareholders and others connected with business (so with stakeholders = parties prenantes)

Each board has a chairman, elected by the directors, who is responsible for running the board. In addition, each board has a chief executive officer (CEO) or managing director who is responsible for running the business on a day-to-day basis. Sometimes the roles of chairman and CEO are combined, although it’s usually considered to be a good idea to set them separated. The board of directors represents the most senior level of management.

Why are most of larger businesses not managed as a single unit by one manager?

There are 3 major reasons for that:

• The high volume of activity of number of staff employed makes it impossible for one person to manage them.
• Certain business operations may require specialised knowledge or expertise
• Geographical remoteness of part of the business operations may make more practical to manage each location as a separate part or set of separate parts

How are businesses managed?

Over past years the environment in which businesses operate has become increasingly turbulent and highly competitive. Various reasons have been identified to explain the changes including:

• The increasing sophistication of customers
• The development of a global economy
• Rapid changes in technology and internet challenges
• The deregulation of domestic markets (for example electricity, water and gas services)
• The increasing volatility of financial markets → importance de se couvrir des risques financiers

These changes have made the role of managers more complex and demanding. Therefore, managers have to find new ways for their business through strategic management. In other words strategic management provides a business with a clear sense of purpose and to ensure that appropriate action is taken to achieve that purpose.

The strategic management involves 5 steps:

1. Establish mission and objectives (who’s doing what for what?)

• A mission statement is a concise statement of the overall aims

Mission statements very often set ambitious aims for the business

Example of mission statements: Axa insurance has the following mission: to be the outstanding competitor in their selected markets by delivering:

• Products and services that their clients recommend
• A great company to work for
• The best combination of profit and growth

1. Undertake a position analysis

• Here the business is seeking to establish how it is placed relative to its environment (customers, competitors, suppliers, technology, economy…) → benchmark.
• This is usually approached through the SWOT analysis

1. Identify and assess the strategic options
2. Select strategic options and formulate plans
3. Perform, review and control

Costs may be classified according to whether they :

• Remain constant (fixed) when changes occur to the volume of activity or
• Vary according to the volume of activity

These are known as fixed costs and variable costs respectively.

Total sales = fixed cost + variable cost.

Full costing : total amount of resources, usually measured in monetary terms scarified to achieve a given objective

A cost unit is one unit of output of a particular product or service.

• Direct cost is the type of cost that can be identified with specific cost units.
• Indirect costs or overhead : these are all other elements of costs in other words those items that cannot be directly measured in respect of each cost unit

Transfer pricing → taxable and procurement

Chapter 1 – Budgeting in an export/import transaction

Before every internationalisation process, it is necessary to plan and to budget because it is important to better allocate resources and for cost accounting reasons.

1. Export budget implementation

Export managers have to pay attention to:  

• Forecasted sales by analysing previous figures and doing a benchmark
• Forecasted costs
• Export margin

1. Determination of price cost of exported products

Cost of production of products sold

+ expenses related to adaptation of products to foreign market (because there are norms like NOREX)

+ customs duties imposed to imported goods

= cost of production of exported goods

+ distribution cost

+ other overheads not included production

= export cost exit France

+ sales expenses

+ financial and hedging expenses (insurance premium)

+ expenses related to export documents

• Bill of lading (B/L) of the shipping documents, the B/ is the most important. It serves 3 main and separate functions. It is a contract between the carrier and the shipper (exporter) in which the carrier agrees to carry the goods from port of shipment to port of destination. It is the shipper’s receipt for the goods.

• The negotiable B/L (its common form ; le connaissement endossable) is a document that establishes control (ownership) over the goods. A B/L can be either a straight B/L or an order B/L.
• A clean B/L indicates that the goods were received in apparently food condition (connaissement net de reserves). However, the carrier is not obliged to check beyond the external visual appearance of the boxes. If boxes are damaged or in poor condition, this observation is noted on the B/L which then becomes a foul B/L (connaissement vissier) that will be unlikely acceptable under a letter of credit (L/C)

• Commercial invoice: It contains a description of the merchandise shipped, including full details on quality, grades, price per unit and total value. It also contains the names and addresses of the exporter and importer the number of packages, any distinguishing external marks, the payment terms and other expenses such as transportation and insurance
• Insurance certificate: to evidence insurance for a shipment, the exporter makes out an insurance certificate that contains information on the goods shipped and it must conform exactly with the information on the B/L
• Consular invoice: some countries may require a consular invoice that varies in its details and information requirements from country to country. It is presented to the local consul in exchange for a visa.
• Certificate of origin: for taxation and Middle East (especially in Israel). It is a document in which certification is made as to the country of origin of the merchandise for customs duties or tax reasons.  
• Packing list (liste de collisage), airway bill
• Phytosanitary certificate for food and agriculture products. It is used to attest that consignments meet phytosanitary import requirements in the country that imports.
• Certificate of inspection doing by Veritas and SGS. It is a document on which certification is made as to the good condition of the merchandise immediately prior to shipment. The importer usually designates the inspecting company such as SGS or Veritas or a government entity.

+ expenses related to logistics (it depends on the incoterm used)

= total export cost

1. Determination of market potential

It deals with the market’s absorption capacity of company products and/or services. Its determination relies essentially on scrutinizing (deeply analyse) quantitative and qualitative criteria of the demand.

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