If you are the CFO of a multinational company

1. 

A multinational company is often subjected to financial and political risks that most domestic businesses don’t have to deal with. Logistical risk, i.e., supply chain management, is one time of risk because there may be uncertainty about the supplier’s ability to deliver on time and within budget. Regulatory risk is another one to consider, as environmental regulations have become increasingly important to international companies recently. Financial risk can also be a problem as converting the dollar to local currency involves risk and expenses.

Small Business says that “there are six general factors faced by multinational corporations that expand internationally:

• Overestimating a local market’s economic potential,
• Large and frequent economic swings,
• Currency exchange fluctuations,
• Basic infrastructure quality and services issues,
• The political climate,
• Cultural sensitivities and assumptions.”

There are some suggestions, however, from National Bank on how a business can reduce international business risk:

• “Take the time to get to know the other party,
• Start slow,
• Do your homework,
• Use secure payment methods,
• Establish a meaningful relationship.”

According to Investopedia, for multinational companies, “political risk refers to the risk that a host country will make political decisions that prove to have adverse effects on corporate profits or goals.” An example of adverse political actions is widespread destruction due to revolution to financial changes that prevent the movement of capital. These multinational companies can minimize political risk by researching how risky the country is, done by an analysis of the country and also by choosing the right business to partner in that foreign country. There could also be a contract in place so that if something happens, there would be a legal basis for recourse, and by hiring experienced local talent that understands the local business climate, the risk could be mitigated. The best option may be to buy political risk insurance. This insurance would compensate the company if an adverse event occurred.

Cash flows can be used to minimize political risk as well. As I just mentioned, an analysis of the country that you’re going into should be quite thorough and the impact of political risk on the business should be identified. The discounted cash flow (DCF) technique could be used to estimate the financial impact of specific events as an input to help the business under its tolerance levels. In addition, having enough cash flows in other sectors where political risk is less would be extremely wise.

https://www.investopedia.com/ask/answers/06/politicalrisk.asp

https://smallbusiness.chron.com/managing-risks-associated-multinational-corporation-78224.html

https://www.forbes.com/sites/steveculp/2012/08/27/political-risk-cant-be-avoided-but-it-can-be-managed/#5de086a73acb

https://smallbusiness.chron.com/strategies-mitigate-international-business-risks-43016.html

2. 

As we think about the importance of international capital structure, there are some key element to keep in mind. Such elements would include the growth of the country’s economy, growth in share price, value expansion of the firm, and cost minimization. Cost minimization can take place when firms expand their debt structure to include international bonds that might carry a lower interest rate than locally, which means a lower payment or cash outflow. 

Cash risk in international settings is most commonly the misappropriation of it, the company can expect to have less control or oversight of its daily operations. An additional risk is that of the foreign exchange market as the firm might not be able to exchange the monies to their local currency for the full amount. Now this can also work the other way as the company could actually earn more money than expected based on the current trading prices. The risk with credit is the lack of identification, ensuring that fraud is minimize and the firm it’s not overwhelmed by back claims from the respective financial firms. Another risk is that utilization of card payment processors, this can also lead to loss of payment due to fraud. Lastly, the biggest risk for inventory management is theft, this goes back to the earlier point of the lack of oversight in daily operations which can lead to the mismanagement of inventory in general.