Budgeting for the real costs of international expansion

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Author: Larry Harding
Date: Spring 2015
From: Financial Executive(Vol. 31, Issue 2)
Publisher: Financial Executives International
Document Type: Article
Length: 2,419 words
Lexile Measure: 1310L

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To use the phrase "global economy" these days is usually redundant. After all, our economy is, by definition, global. And the question many U.S. businesses now face is not if they will expand internationally, but when.

Each company's motives for expansion will vary. But the potential benefits involved are usually pretty clear, and range from taking advantage of new and expanding markets for top-line growth, to gaining efficiencies by reducing expenses, and increasing a company's global footprint to better position itself for an initial public offering.

However clear the strategy is, often far murkier are the costs and risks involved with establishing operations in a new country. It is critical for organizations to reasonably account for all the costs of a global expansion during the due-diligence process when they are evaluating an overall cost-benefit return, so they can compare expectations in different countries, make accurate P&L projections, hold people accountable for results, and, ultimately, justify their decisions to expand into a particular target country, to look elsewhere, or even not to pursue a global initiative at all.

Businesses new to international expansion can fall prey to one understandable but costly mistake during the budget-planning process. That is, they assume that operating in another country is more or less the same as operating in the U.S. These newcomers typically begin their planning by drawing up a list of common domestic expenses, like corporate income taxes and office operating costs. Then they go online to find target-country rates, real estate costs, and other typical expenses. They make adjustments based on the target-country data and the domestic expenses and --voila!--they have the data they think they need to make reasonable cost projections.

Unfortunately, successful global expansion is rarely that simple. Each country has a unique set of laws and regulations --and ways of doing business and interacting socially --that change constantly. Unfamiliarity with country-specific laws and cultural idiosyncrasies can lead to serious gaps in a business's cost-benefit analyses, which in turn can provide unpleasant surprises if a company proceeds with an expansion based on false premises.

Even something seemingly as simple as opening a bank account in another country--often a legal requirement for establishing activities--can take months to accomplish. If a business fails to account for this fact, and its strategy demands setting up operations quickly, the whole project may be doomed before it really begins.

The good news is that budgeting, when done properly, doesn't itself create success or failure. Rather, it eliminates the menace of surprise. A company well into the due-diligence stage of the expansion process will have explored the business-related questions it must ask--like whether it can sell its products or services at a good price, if it can sell enough, and if it can get an attractive return. Higher-than-expected establishment and operational costs will only rarely mean that the decision to expand was the wrong one. But it's important to go into the budgeting process armed with the right questions, because no one likes budget surprises.

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Gale Document Number: GALE|A417022050