O 201 The Global Control System and Performance Evaluation

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In order to achieve the firm's primary goal of maximizing stockholder wealth, the financial manager performs three major functions: (1) financial planning and control, (2) investment decision-making, and (3) financing decision-making. These financial functions cannot be performed effectively without adequate, timely accounting information. The two fundamental financial statements of any company are the balance sheet and the income statement. The balance sheet measures the assets, liabilities, and owners' equity of a business at a particular time. The income statement matches expenses to revenues in order to determine the net income or net loss for a period of time. In addition to these two financial statements, a control system is used to relate actual performance to some predetermined goal.

The actual and potential flows of assets across national boundaries complicate the accounting functions of an MNC. The MNC must learn to deal with environmental differences, such as different rates of inflation and changes in exchange rates. If an MNC is to function in a coordinated manner, it must also measure the performance of its foreign affiliates. Equally important, managers of the affiliates must run operations with clearly defined objectives in mind.

An MNC consists of the parent and its subsidiaries in foreign countries. To operate the MNC as a system, the parent and its subsidiaries need continuing flows of data. Hence, the key element in the control system is the company's system for collection and dissemination of data on a worldwide basis. The company's information system between the parent and its subsidiaries generally consists of: (1) impersonal communications such as budgets, plans, programs, electronic messages, and regular reports; and (2) personal communications such as meetings, visits, and telephone conversations.

Communications essential to evaluating the performance of an enterprise usually follow established organizational channels. An effective communication system requires an efficient reporting system for collecting information on the results of actual operations and for disclosing deviations from predetermined standards. The more efficient the system, the more quickly managers may take corrective action.

Financial results of profitability have traditionally provided a standard to evaluate the performance of business operations. However, as MNCs expand their operations across national boundaries, the standard itself is affected by the environment in which they operate. Inflation and foreign-exchange fluctuations affect all the financial measures of performance for MNCs. To compare the results of various affiliates of an MNC, multinational financial managers must understand the various ways in which inflation and exchange fluctuations affect operations as measured by traditional financial statements.

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