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Financial Fundamentals: Taxes and Currency
Taxes and Currency reflect the business operations financial interactions with governments.
When to Use Taxes and Currency
Taxes and currency implications are inherent in all business financial transactions. However, most operational managers do not have any direct impact or effect on either of these. These topics are usually managed by the Finance Department. Occasionally, Finance will provide direction to operational managers based upon issues associated with these topics.
- Governments collect money from companies through taxes, duties, permits and licenses. There are specific, and often complex, laws and regulations describing how these are calculated.
- Income taxes are based upon business earning and are usually calculated with quarterly or annually.
- Property taxes are based upon the level of assets owned by the company – typically the fixed assets and inventory.
- Duties are based upon the value of materials and products shipped and where they are shipped.
- Permits and licenses are based upon the nature of the business operations at each location.
- Normally Finance manages the calculation and payment of these, but as can be seen; all of these are significantly impacted by operational decisions.
- Currency is the term used for the name of the monetary basis in which financial transactions are calculated. Some countries have their own currency and some countries share a common currency.
- Currency is created and managed by governments. Currency of one county will vary in value with currency of other countries based upon macro-economic and political issues which can change daily.
- Multi-national organizations will normally have transactions occurring in multiple currencies. The company will need to exchange currencies to maintain adequate reserves in each location – some will accumulate currency and others will consume currency. Finance manages when the currency exchange will take place based upon the relative valuations and business needs. Day–to-day variations can significantly impact the value of any transaction.
- To ensure financial reports are clear and understandable (please don’t laugh) there are two financial accounting systems that are used by most companies. Each country has adopted one of these systems, although they may have country-specific addendums.
- One system is known as FASB/GAAP – Financial Accounting Standards Board/Generally Accepted Accounting Principles. This standard is maintained by an independent non-profit organization based in the USA.
- One system is known as IAS/IFRS – International Accounting Standards/International Financial Reporting Standards. This standard is maintained by the European Union.
Hints and Tips
- FASB/GAAP and IAS/IFRS deal with reporting and accounting standard, not taxes, duties or permits. Finance must manage financial transactions in light of both systems.
- Generally speaking, operational managers should decide what they need to do to run the business well, then work with Finance to ensure the transaction that implement their decisions are done in accordance with the standards and in a manner that is in the best interest of the company.
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