Suppose a U.S. wood-products company has facilities and employees in Canada providing its raw materials (wood), but has most of its sales in the United States.
(1) What are the most important operational and financial risks in this arrangement? (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? Furthermore, how can it calculate its profit if revenue is in U.S. currency and most of its costs are in Canadian currency?
In your responses, provide constructive critiques and supplemental insights. Support your critique with sound reasoning and evidence.
There are always many factors to discover when looking at the operational and financial risks of conducting business in many countries.
One of the most significant financial risks is a currency conversion. Regardless of the country, any business that is conducted from country to country will require conversion. Due to rates and charges, there is always money lost in the process. Any fluctuations in the country’s currency could cause a loss of profit. It is essential to take this into account when purchasing materials. While these costs can be estimated, it will never be guaranteed amount.
An operational risk falls under regulatory issues with trade. While materials can be shipped from one place to another, laws, vary from country to country. When doing business with Canada, teams in the US will need to understand trading laws and any regulatory issues that may cause a halt in operations. Ignoring these laws or not understanding them in its entirety could cause products to not be delivered, resulting in lost profits.
In many countries, employee pay always presents an issue. Due to the differences in the minimum wage, the biggest issue will be making sure everyone is paid the same regardless of the country they reside in. If employees aren’t paid the same within the country, this could cause friction and affect the morale of employees, potentially causing the output of work to drop. Having the payroll department properly calculate exchange rates will ensure that everyone is paid the correct amount with fluctuations taken into account. In general, the conversion of currency is a simple change. If financial departments consistently keep track of all costs incurred, profits made, and the proper exchange rates, conversion into American dollars with that rate taken into account, the company will know how much they are retaining in profits.
Beers, B. (2020, May 4). Top risks for international businesses. Investopedia.
Operational risk can have an immediate impact on an organization’s assets and financial capital which they utilize to run their daily business operations. Operational risks can be the direct result of human error and can vary depending on the industry that the organization is operating in. Macroeconomic advantages include overall lower costs for production facilities in Canada versus the US. Canada is a global trading partner, facilitating business globally. (Tam, 2020). Canada also has a strong economy and many natural resources.
Companies that operate internationally have greater risk exposure than companies that only operate domestically. When there is an arrangement between a US company and their Canadian employees, exchange rate fluctuations can have a direct impact on employee wages and salaries. Companies typically will book reserves to account for currency fluctuations that impact wages. Financial risk can be largely affected by the currency exchange rates as well as government regulations that affect how and when a company can have access to their funds in a foreign country. Additionally, a company needs to worry about the possible effects of devaluation and inflation which can affect the company’s profitability and stability. Even with the Canadian dollar representing a more stable currency than that of emerging markets, the Canadian dollar still finds itself highly sensitive to the demand for exports (Tam, 2020). To help mitigate this, a company could hedge their money. If the exchange rate is at an advantage and a business knows it will be doing business in the future, they can purchase money at the better rate to use in the future. Hedging against investment risk means strategically suing instruments in the market to offset the risk of any adverse price movements (Investopedia, 2020).
Investopedia. (2020). A Beginner’s Guide to Hedging. Retrieved from
Tam, M. (2020). What to Know About Doing Business in Canada. Retrieved from