Outline_the_Objectives_of_Financial_Management_and_Analyze_Financial_Strategies_Which_Need_to_Be_Addressed_When_Managing_Global_Expansion.

Globalisation has changed the way businesses operate extensively. Businesses are now not just targeting their products and services at the domestic market, but also are expanding their distribution channels to include international markets as well. This is being done to take advantage of the economic integration that has been taking place in order to achieve the various objectives of financial management more successfully. In order for this to take place numerous financial strategies are used by business. The objectives of financial management include:  Liquidity- The ability of an organization to pay its short term obligations as they fall due. This is measured by the current ratio (short term assets/short term liabilities) and is based on being able to obtain cash to pay the general short term costs associated with production, distribution and sale of the product. Liquidity needs to be maintained by a business or their productive capacity is restricted.  Solvency – the extent to which a business can meet its financial commitments in the longer terms. Solvency is measured using leverage or gearing ratios (total liabilities/total equity.) If a business is insolvent then the business entity may become bankrupt leading to liquidation of assets to pay debts.  Profitability- The ability of an organization to maximize its profits. This can be measured in numerous ways including net gross profit ratio (gross profit/sales) and net profit ratio (net profit/sales). It demonstrates how much money the owners actually earn after expenses and costs of the goods sold. Without effective profitability, short and long term debt requirements won’t be able to be paid. Profitability is a major issue for every business, for instance Telstra, one of the most prominent Australian businesses, net profit was only at 1.8% which is significantly below industry standards.  Efficiency – The ability of an organization to minimize its costs and manage its assets so that maximum profits are achieved with the lowest level of assets. Businesses expand overseas to take advantage of cheap labor and tax rates in order to maximize efficiency.  Growth – Ability of an organization to maintain profits in the longer term. Short term profitability is important to meet and exceed expenses however the business has to be successful over an extended period of time to remain a viable investment. Businesses diversify their business into new markets to ensure that the demand for their products doesn’t decrease and accordingly enables long term growth to take place.  Return on capital – Amount of profits returned to owners or shareholders as a % of capital contribution. The return on investment ratio (net profit/ owner’s equity) measures the return on capital or investment and is one of the best indicators of profitability in a business. Expanding overseas can be a big investment so the market must be viable to enable a strong return on the owner’s equity ratio. There are numerous financial strategies that businesses need to address in expanding globally in order to achieve management’s financial objectives. These include:  Methods of payment and credit risks associated with them- One of the most crucial aspects of financial management is to select an appropriate method of payment. There are five basic methods of payment a business can select:  Payment in Advance – This method allows the exporter to receive payment and then arrange goods to be sent. This is the safest option for the business because the money has to be received before the transaction continues. This is also beneficial in meeting short term liabilities because the money has entered the businesses accounts before the expense of distribution is required therefore working capital remains steady.  Letter of credit – is a commitment by the importers bank which promises to pay the exporters specified amount when the document proving shipment of the goods re present. This is the second safest option for exporters and the only real disadvantage is not obtaining the funds before the costs of distribution have been made. Although this is the case the funds will quickly be received so a problem shouldn’t arise.  Clean payment – occurs when the payment is sent to, but not received by the exporter before the goods are exported. This is the quickest and easiest method of settling international transaction with little risk for the exporter. Although this is the case a high degree of trust needs to be established and accordingly it isn’t a popular method for importers.  Bill of Exchange - is a document drawn up by the exporter demanding payment from the importer at a specified time. This method of payment is the most widely used and allows the exporter to maintain control over the goods until payment is either made (bill against payment or guaranteed (bill against acceptance). Although this is a common method, there are many issues associated with it such as delay or non payment. This leads to wasted resources and decreased efficiency as well as issues in covering current liabilities.  Open credit (account) – Allows the importer access to the goods, with the promise to pay at a later date. This method exposes the exporter to the greatest amount of risk as the exporter is totally reliant on the importers ability and willingness to pay. Therefore this payment must only be used with trusted customers due to the risk of non and late payment. A stringent credit policy must be established in order to encourage on time payments to ensure liabilities are met and efficiency with funds is maximized.  Use of Hedging – Hedging is the process of minimizing the risks of price fluctuations which become an issue when exporting. For instance an appreciation of AUD can make exports comparatively more expensive for importers therefore leading to decreased potential sales made. Hedging involves making the transaction based on the spot exchange rate which is the value of once currency in terms of another currency on a particular day. This makes the transaction immune to any fluctuations that may take place and effectively ensures business goals are more readily able to be achieved with increase access to the international market. A business needs to determine if and when to use this strategy to ensure stability resuling in maximizing profits.  Use of derivatives – a financial instrument that is used to lesson the exporting risks associated with currency fluctuations. Derivatives, if used ineffectively, can be as detrimental as the risks they aim to protect so it is important to use them wisely. For instance, in 2000 the Australian business Energex Technologies came close to collapse as a result of having inappropriately used the derivatives to hedge itself against changes in oil prices. The three types of derivatives include-  A forward exchange contract – a contract to exchange one currency for another currency at an agreed exchange rate on a future date.  An option contract – Gives the buyer (option holder) the right, but not the obligation, to buy or sell foreign currency at some time in the future.  A Swap contract – is an agreement to exchange currency in the spot market with an agreement to reverse the transaction in the future.  Insurance – used by business to protect itself from other risks besides exchange rate fluctuations. The federal government established the Export Finance and Insurance Corporation (EFIC) which aims to provide insurance for exporters in case they don’t receive payment and political risk. Lend Lease Corporation is a business who has gone into the global market with recognition of the risks involved. As a result they incorporated hedging with the use of derivatives and operate a comprehensive risk management program to ensure problems didn’t arise. Expanding overseas involves much more risks then a domestic business faces. These strategies all work to minimize these risks in order to maintain effective financial management with the businesses financial goals being met.