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Taxes and Currency reflect the business operation's financial interactions with governments.
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Quick reference
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.
Instructions
- 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.
- 00:04 Hi, I'm Ray Sheen.
- 00:06 Let's now talk about the financial impact that government policies
- 00:11 can have on how a business should be managed.
- 00:14 Of course, any discussion of government and business will need to address taxes.
- 00:18 Let me just say that for the purpose of this discussion,
- 00:20 I'm going to ignore the ability of the government to print money.
- 00:23 That should not be affecting the management decision of a business, unless,
- 00:27 of course, you're providing paper and ink to the government.
- 00:30 Taxes, duties, fines and fees are how government makes money, which
- 00:34 means they get money by taking it from others, and that includes your business.
- 00:38 Businesses are often taxed based upon the processes they operate and
- 00:42 the value of things that the business owns or controls.
- 00:45 Every country has its own complex tax code.
- 00:48 But taxes and fees fall into one of these general categories, permits and
- 00:52 fees to operate the business or a business process such as business license or
- 00:56 wastewater permit income taxes based on that earnings, usually paid quarterly or
- 01:01 annually, property taxes based upon the value of assets like buildings equipment
- 01:06 inventory, and some financial assets.
- 01:09 These are normally paid annually.
- 01:11 Duties and tariffs are based upon the value of goods being shipped
- 01:14 to other locations.
- 01:16 As I mentioned, tax laws and regulations are often complex.
- 01:20 In addition,
- 01:20 every country, sometimes even every city, will have their own unique tax code.
- 01:25 This is full time work for finance to keep up with tax.
- 01:29 As operating managers, you'll not need to fill out the forms and
- 01:32 learn the regulations.
- 01:33 Make wise business decisions and let finance know what you did.
- 01:37 They may occasionally ask you to change the date on which transactions will occur,
- 01:41 to reduce the tax liability.
- 01:43 Currency is another aspect of government that we must deal with as business
- 01:47 managers.
- 01:48 Currency is just another name for money.
- 01:50 Some countries have their own unique currency, like the Japanese Yen.
- 01:54 Other currencies are shared by many countries, like the Euro.
- 01:57 The value of the currency is impacted by government policy at macroeconomic
- 02:01 factors.
- 02:01 Governments try to control the value of their currency, but there's only so
- 02:05 much they can do.
- 02:06 The currency exchange rates between some currencies change daily.
- 02:10 So why do we care?
- 02:12 Well, if you work for a multinational company doing business in many countries,
- 02:16 you will find that local business is done in the local currency.
- 02:20 Now, currency fluctuations should not impact your day-to-day decisions, but
- 02:23 sometimes it will constrain operations as currency stacks up in one country and
- 02:28 you have a shortage in another.
- 02:29 Finance will let you know when and where there may be constraints.
- 02:34 Most companies will eventually need to convert the currency of other countries
- 02:37 into the currency of the country in which they do their financial reports.
- 02:41 However, because of the fluctuations, there are people in finance who's job is
- 02:45 to track currency markets and make transactions when the timing is favorable.
- 02:50 Let's wrap up this module with a quick overview of financial standards.
- 02:53 There are two primary financial standards and systems.
- 02:56 One or the other is applied to most businesses.
- 02:59 These standards focus on how costs and sales are recorded and reported.
- 03:03 The emphasis is on the financial system.
- 03:05 By following one of these systems investors and customers
- 03:09 can have confidence in the financial reports and know how to interpret them.
- 03:13 As operating managers, we don't care which system is used.
- 03:16 We make wise business decisions and finance will take care
- 03:19 of insuring the transactions are placed in the correct column and
- 03:22 that reports are completed the correct way.
- 03:26 With that said, if finance tells us that we need to do something in a certain way
- 03:30 to be compliant and it achieves our business goal, don't argue, just do it.
- 03:35 If it does not achieve the goal, then push back and have finance help you to find
- 03:39 a way to do what needs to be done and to do it in accordance with the standards.
- 03:44 Although these standards are recognized around the world,
- 03:47 many countries will have their own addendums to these standards so
- 03:51 that they can have a special or unique report generated.
- 03:54 Once again, you don't need to know this,
- 03:56 the people in your finance Department should.
- 03:58 One system is FASB/GAAP, which stands for
- 04:01 the Financial Accounting Standards Board / Generally Accepted Accounting Principles.
- 04:06 FASB is a non profit, non governmental association in the USA.
- 04:10 That publishes and maintains the gap standard.
- 04:13 The other system is IAS IFRB.
- 04:16 International Accounting Standards.
- 04:18 International Financial Reporting Standards.
- 04:21 These are published and maintained by a department of the European Union.
- 04:25 From an operational manager standpoint,
- 04:27 the two systems are essentially equivalent.
- 04:29 We still need to make good business decisions and
- 04:31 record them correctly in the financial books.
- 04:33 Finance will take care of the rest.
- 04:35 Governments help to insure a business environment that is predictable and
- 04:40 that's a big help to companies.
- 04:42 Yes, we must pay taxes and deal with different currencies and
- 04:45 financial standards, but that's a lot better than chaos.
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