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In your responses, provide constructive critiques and supplemental insights. Support your critique with sound reasoning and evidence.
Below is the discussion to respond to:
- What are the most important operational and financial risks in this arrangement?
This arrangement presents several operational and financial risks. The primary financial risk associated with international business is foreign exchange fluctuations. Since the company operates in both Canada and the US, it has to be involved in currency exchange. Every country has its own currency and the value of that currency may change over time due to myriad factors that affect foreign exchange rates. Fluctuations of a foreign country’s currency can diminish profits when converting back to the home currency. A secondary consideration is a political risk, which can increase the cost of doing business in another country based on changes in political leadership in Canada. Local authorities also may fail or refuse to enforce business deals. The other one is regulatory risk (Shenkar et al., 2014). Environmental regulations can affect the entire bottom line, and many countries such as Canada have stricter environmental standards than the United States
(2) How can the company pay its Canadian employees, who presumably want Canadian dollars, when its U.S. customers are paying in U.S. dollars?
There are a number of options the company can consider to pay its Canadian employees. One way is asking a local partner or third party company to place them on their payroll. If the company has existing business relationships in the foreign country which is Canada in this case, then the company could ask them to payroll its employees locally. The third party becomes the â€˜employerâ€™ for payroll administration, and the actual employer company remits the salary through them for withholding and required contributions. The other option is paying them as independent contractors (Brake et al., 2015). This method, however, works well for some projects or positions and may not work with this company well. positions such as those accountants and lawyers work well with this method.
Furthermore, how can it calculate its profit if revenue is in U.S. currency and most of its costs are in Canadian currency?
To calculate its profit, the company should perform what is referred to as foreign currency translation. The company should first start by determining its functional currency. The functional currency is the currency that the company makes use of in its business transactions which in this case is U.S dollars. The company, therefore, should translate its costs which are in Canadian currency to US dollars using the current exchange rate. For instance, if it is something related to assets and liabilities, this can be translated using the current exchange rate at the balance sheet date for assets and liabilities (Brake te al., 2015).