The Budgeting Process in a Multinational Firm

Abstract

The budgeting process and the end result, the budget, comprise two essential elements of multinational management: planning and control. Planning is the primary function of the budgeting process and the result, the budget, provides the basis for subsequent monitoring and control of activities. For a multinational firm, with geographically dispersed subsidiaries to coordinate and control, an ineffective planning and control system can be disastrous. For the typical multinational firm, the budgeting process is the primary period of planning at both corporate and subsidiary levels. During the planning phase, the subsidiaries establish short-term goals and objectives, devise appropriate operating strategies, and prepare a budget document for subsequent monitoring, control, and evaluation of operations. At the corporate level, the various subsidiary budgets, once translated into United States dollars, are consolidated into an overall, or master budget which provides a view of overall, future activities, forecast of cash flows, and financial performance. This forms the cornerstone of the multinational's short-term planning. Therefore, it is important that each subsidiary realistically evaluate future opportunities, risks, and rewards. It is also important that the budget document represents a realistic projection of the future. This is not an easy task for the multinational firm to accomplish. The budgeting process is complicated by the multiplicity of unique country-to-country variables. Each operating environment has varying opportunities, risks, and rewards. Each differs substantially in terms of social, economic, and political structures. As a further complication, the subsidiary managers will most likely have varying cultural attributes in addition to differing educational and professional backgrounds. Consequently, knowledge, preference, and application of budgeting techniques may differ from country to country and manager to manager. These factors create a challenging budgeting environment for the multinational firm. Although the budgeting process is an important element of success, very little is known about the methods which multinational firms employ to insure that the subsidiaries present a realistic and reasonable projection of future events. Although there is extensive information about budgeting in the management accounting literature, there is very little information about the specific techniques employed by the managers of multinational firms to develop and formulate budgets. This case study was undertaken specifically to determine the methodologies utilized by the subsidiaries of a multinational firm to standardize and coordinate the overall budgeting process and, more specifically, the development and formulation techniques used at the subsidiary level. To accomplish this, arrangements were made with a U.S. multinational firm to study and evaluate budget procedures at both corporate and subsidiary levels. THE BUDGETING PROCESS THE MULTINATIONAL FIRM The U.S. based, multinational firm studied is in the service industry and has 60 subsidiaries located in 22 different countries. The firm is highly decentralized and each subsidiary operates as a profit center with a general manager responsible for all day-to-day administrative and operating decisions. The organizational structure of each subsidiary is quite similar. There are typically five departmental managers, all of whom are members of the executive committee responsible for budget preparation. Tow of the departmental managers are responsible for multiple profit centers, the others manage cost centers. Generic, image-type advertising is the responsibility of the regional, corporate offices. Country, or area, specific advertising is the responsibility of each subsidiary. The general managers report directly to one of five, regional senior vice presidents, depending on country location. The senior vice presidents, four of which are located in regional offices outside of the U. …