Multinational companies, such as FedEx, Kraft, and Pfizer, have operations in many countries. An international presence has benefits—access to new markets and resources—and drawbacks—operating in less-familiar business environments and exposure to currency fluctuations. When preparing budgets, managers of multinational companies need to understand the political, legal, tax, and economic environments of the different countries in which they operate. They budget revenues and expenses in different currencies but also budget foreign exchange rates to convert these earnings into their home currency (say, U.S. dollars). In some countries, such as Turkey and Zimbabwe, where annual inflation rates are very high, the value of the local currency can decline sharply. To reduce the negative impact of unfavorable exchange rate movements, finance managers frequently use techniques such as forward, future, and option contracts to minimize the impact of foreign currency fluctuations (see Chapter 12).
When there is considerable business and exchange rate uncertainty related to global operations, a natural question to ask is: “Do managers of multinational companies find budgeting to be a helpful tool?” The answer is yes. When conditions are volatile, budgeting is not useful for evaluating performance. Instead, managers use budgets to help them adapt their plans and coordinate their actions as circumstances change. Senior managers evaluate performance more subjectively, based on how well subordinate managers have managed in these constantly shifting and volatile environments.