3 Financial Activities that a Multi-National Company commonly Spend On (Essay Sample)

Nestle Multinational Company
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Nestle Multinational Company
Memo
To: Applicant for the position of cost Accounting Analyst
From: Mr. Bill Gate, CEO, Microsoft
RE: Test on understanding the Basic financial concept
It is an essential tool that everybody, particularly those working in firms and large organizations, knows the basic principle systems concerning financial aspects. The aspect of finance is critical to any organization, mainly when it comes to financing, investing, and operation activities. Such concepts help understand the knowledge that should be used when conducting operations. Thus, it would be important that everybody understands concepts related to finance.
Yours Faithfully,
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Introduction
As the world economy continues to be integrated the number of Multi-National Companies has been increasing. These are companies that operate in more than one country at a certain time. For multinational companies, foreign sales account for more than forty percent of the total income. During the pandemic lockdown and restrictions, these companies witnessed a high level of growth due to increased consumption thus increased markets in this period. Multinational companies contribute significantly to the world economy therefore it is essential to understand their financial programs and the expenditures that they incur in their daily operations. To ensure their stability these firms have to take advantage of the policies of the countries they operate in that is if the financial policies are favourable in a certain country as compared to their home country, they can utilize those policies to their advantage. These companies are tasked with making tough decisions daily about their financial activities. During tough economic conditions, the cost of finance and capital accessibility is negatively affected. One advantage of these firms is that they experience a high level of flexibility when sourcing for finance since firms can borrow from any bank worldwide and they can also issue shares in any country. The corporations should be keen when determining the best way to finance their activities. Due to their vast operations, these companies incur a wide range of expenses. There is a need to evaluate these expenses to ensure that they do not exceed the income also to ensure maximum income they should base their operations in countries where the operation costs are low. This will reduce the number of risks that the company faces. This paper will address the expenses that large operations mainly incur, the different types of financing available to them, factors to consider when obtaining financing, and the investment appraisal techniques of the Nestle Malaysia Company.
* Three financial activities that multinational companies would mostly spend on
The cost of debts is the main expenditure of these firms. This is the cost incurred when the company is seeking debts it includes interest rates. A company whose level of debt has increased has to have an increased cost of debt. The Nestle group witnessed an increase in the level of debt in 2021 it increased from CHF 31.3 billion in 2020 to CHF 38.5 billion CHF in 2021 (Widz, 2015). This negatively affected the dividend payment and the cash inflow of the organization. The statements showed a decrease in the cost of debt despite an increase in the debt. Therefore, the firm took more debts at a lower cost thus it was a favorable year for the group. In 2021 the tax rate paid by the group was reduced to 17.4% and the underlying tax rate was reduced to 20.2% in the year's first quarter. This was attributed to the different geographical locations of the subsidiaries and branches and the different businesses the group undertakes. Companies have to pay taxes in the countries they operate in therefore taxes are an essential part of any business operations and companies should meet their financial obligations to avoid friction with the governing authorities. They should be included in the calculation of expenses incurred.
The company invests heavily in research and development this is to ensure that the company has a vast knowledge of the market, its customers, their needs, and also future developments that customers need in their products. To ensure this the company invested 1672 million CHF in 2019 and 1687 million CHF in 2018 (Uchel et al., 2019). These funds were used to ensure that Nestle offers products that are in line with the evolving needs of its consumers. They were also utilized to ensure innovations and the development of new products to ensure they meet the needs of their customers. The company also invested in scientists, technical and support staff in their factories and shops to ensure smooth operations and that their customers do not lack their favorite products in the market. Understanding the market has led the company to be a global distributor thus the penetration of the market and has also enabled the company to create loyal customers worldwide due to its high-quality products. Recent developments in the company were the introduction of plant-based products to supplement their animal-based products. To ensure that it remains relevant in the market the company has to train its staff, acquire new technology, innovate and also market itself, therefore, research and development is an essential part of the company’s operations
To ensure that its products get to the market the company has to incur delivery costs. Since it is a multinational company Nestle has to invest in diversified delivery channels this will ensure that the company delivers its goods in good quality, at the agreed time, and without tampering with the contents. Distribution is an essential activity of these companies. The pandemic reinforced the need to have a better delivery system since most people wanted goods delivered to their homes, Nestle has not been left behind by companies seeking to improve on their delivery so that they can reach customers in remote areas. Due to the need of supplying raw materials to their branches and subsidiaries this cost has become an essential part of the company. Since it is a Food and Beverage Company and its products are highly perishable the company has had to invest in delivery means which will ensure the food arrives in the best condition. Also due to its recent investment in e-commerce and online deliveries due to the pandemic the company launched the ‘at home’ products in partnership with Starbucks, to make Starbucks products easily available to customers at the convenience of their homes. The company has had to change and develop its delivery channels to meet the dynamic world thus increasing delivery costs. In 2020 e-commerce sales grew by 48.4% which accounted for 12.8 % of the group sales this further shows the importance of improved delivery channels (König, 2018).
Marketing costs. The company has to incur these costs if it aims to remain relevant in the market. This company was established a long time ago, therefore, its products are well known and are consumed all over the world by its loyal customers. However, despite this, the company has to penetrate new markets and announce the launch of new products this, therefore, calls for the company to invest in the best advertisements to capture the attention of both new and existing customers this will cause the company to incur additional costs to ensure this. The company has to offer discounts to promote their sales once in a while therefore further costs are incurred. Due to stiff competition, the company has to adequately promote market its products so as not to be overtaken by new and emerging firms.
* Different types of financing available
The Nestle company can decide to raise funds through equity financing. Here the company can decide whether to sell the stock locally or overseas. It can offer these services to both individuals and companies where they will acquire a part of the company and receive dividends or capital gains from the shares they purchased (Chen et al., 2020). The company will in turn utilize the finances it has earned from this sale to sort out the financial need required at the time. The advantage of raising funds through this is that firms do not have to pay instalments or interest rates at a particular time like bank loans. It is also an easier source of finance since the company is already listed at the stock exchange market thus it will only need to advertise the sale there. The company can raise more funds through this method since the global equity market will reach a wide range of participants thus it can get better prices from a large client base. Raising capital locally will ensure that the Company reduces the risk of currency risk that from foreign operations. The disadvantage of this method is that it reduces the management control since the shareholders can vote to approve or oppose the management decisions.
The company can raise funds through debt financing, this involves acquiring money and agreeing to pay the principal amount plus the interest at a particular future date. This can be done by obtaining bank loans. The main advantage of this is that the management does not give up control therefore no interference from outsiders (Chen et al., 2020). A company should borrow from banks that offer low interests to maximize the cost of debt. Firms with a higher debt capacity are likely to get higher debts from financial institutions. The company can also obtain funds from trade credits and loans with their parent company; trade credits ensure that the subsidiary can make payments of goods and services at a later date without incurring any penalties (Hyun, 20...