I once heard a group of CFOs describing their firms’ international operations. All but one CFO touted how they had contained the “risk” of international business by convincing their firms to only use local distributors and insist on cash in advance payments in home country currency. These firms weren’t new to international markets, but were so concerned with containing the risks in international business operations, that they missed any form of strategic alignment between domestic and international operations. There was no balance between risk and reward.

The role of the CFO is to balance estimated revenue in international markets with the costs of doing business in those countries. This balance point must also consider the firm’s overall strategy and international strategy. For instance, if the company’s product requires a large capital investment to bring to market and does not require high levels of localization to sell abroad, then the firm can gain from economies of scale. Gains from these economies must be included in balancing cost with revenues. Another example: if your customers typically buy either replacement products or add-on products, then cultivating long-term customer relationships is key to keeping marketing costs low. Over time, foreign customers with a good credit history with your firm should be offered better payment terms that reflect this trust. This also creates a barrier to switching to a competitor’s product and increases loyalty. Distributors, like cash-advance payment terms, are most appropriate for firms that are just starting international expansion. Risk is low but profits are low too. Additional investment can fit strategy better and increase profitability of overseas operations.

As CFO, you should be visiting your foreign operations. Your role is to ask questions, meet customers, and better understand both the risks and rewards. In every financial decision you make related to a foreign operation, you need to be asking yourself: which option fits best with our firm’s strategy? And then which option gives us a projected net gain of reward over risk?

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