Question 1Efficiency in investment depends of risk, return, and the costs incurred in managing the investment. Establishing subsidiaries in Eastern Europe, Asia and Africa is a good strategy for IBF Supplies Plc. However, before the company implements this decision it has to consider both the financial and non-financial aspects in order for it to be successful. A company that wants to expand its business must have a strong financial base. Financial pressure affects investments of firms (Carrascal and Ferrando, 2008). The company should consider the following financial factors before establish its subsidiaries in the three coninents.
They include taxation policy, the level of cash flow, indebtedness and capital. The company should consider the taxation policy in the host countries to establish the subsidiaries. In the current business world, governments compete to attract MNCs and this has made the fiscal incentives a global concern. Low tax rate in the host counties should be the major factor to be considered by IBF Supplies Plc, since it intends to start subsidiaries in multiple markets. Starting the subsidiaries in countries with low tax shall give the company the chance to establish strategies to avoid tax.
It is normally hard for a country to take the responsibility of taxing the holding company which has established subsidiaries in different markets. Some of the tax instruments used by governments to encourage multinationals relates to corporate income tax like tax allowance and tax holidays (Morisset and Pirnia, 2000). Therefore, the company should understand different governments’ policies related to tax before it decides on the location of its subsidiaries in the three continents. Cash flow defines how a company receives and spends its revenues.
In order for a company to be successful, it has to experience increase in the cash flow. IBF Supplies Plc should consider managing its cash flows well, and avoid spending more revenues on operating expenses. There is a relationship between the profits a company gets and its capital demand. A company that has high level of cash flow compared to its assets shall be able to expand its investment faster (Carrascal and Ferrando, 2008). Establishing subsidiaries in the three countries requires huge revenue, which could be a challenge to the company in case it runs short of a stable cash flow after resuming operations in foreign countries. According to Carrascal and Ferrando (2008) most businesses rely on debt to carry out their various operations.
Companies use debt to finance projects in situations where the internal resources are not available. Although debt is sometimes necessary to a company, the commitment involved in repaying the debt could affect the company’s spending decisions. IBF Supplies Plc should evaluate its level of debts before it implements it expansion strategy. A company that has many debts experiences financial pressure and this adversely affects its level of investments.
Highly indebted business enterprises encounter difficulties getting more funds from the external environment to finance their business. However, firms with high levels of investments attract external funding (Harif, Hoe and Noor, 2011). Therefore, the company should analyze its financial position to determine whether it can acquire more funds to facilitate its projects in the three countries. This is because the company may need extra funds in form of debt to finance its projects.