With today’s emerging changes in the economic environment, the way business is done has evolved, leading companies to review their current operational strategies and business objectives. Increased market competition, stringent governmental regulations, and industry attractiveness are only a few forces, all of which depend on where the firm is situated. These later drove organizations to pursue further growth opportunities in other jurisdictions, employing the so-called, “geographic diversification”.
Geographic diversification can be viewed as similar to business expansion and/or acquisition of new additional investments. Firms attempt to extend or venture into operations outside the head office, most often in other countries, thereby spreading assets across different geographical points. This being an addition to the firm’s investment portfolio, creates the demand for an in-depth study, careful planning and most importantly, financial background.
Appraising the likelihood of diversifying, requires multiple factors to consider. Making this decision is irreversible and therefore critical assessment is a prerequisite in the process. The following are among the major factors:
1. Financial Health
Intending to achieve a diversified investment portfolio has to dwell first on the question of financial capacity. Diversification would require huge financial outlays (e.g. entry and operational costs) to anticipate, sufficient to need a comprehensive evaluation of the firm’s current financial situation and prospects. Businesses sometimes even resort to external financing if the status shows difficulty at the firm level. And if it appears to be unlikely, firms may further evaluate its short-term projects and turn down some – making use of capital budgeting models (ROI, payback period, internal rate of return, etc.) as the bases for evaluation. The bottom line is to decide on the grounds of long-term profitability and viability while guaranteeing that the present business is running smoothly.
Taxes are the ‘lifeblood’ of a nation, which inherently allows all states to exercise this power. Needless to say, investment decisions could, to a possible extent, be affected by taxation policies in the jurisdiction(s) the company intends to operate. Firms would have to dig into the income and business tax implications before conducting business as these are mandatory costs affecting capital reserves or savings in the long run. This regulatory hurdle however, does not deter companies from penetrating economic markets for certain considerations that may outweigh its costs – market attractiveness (as to size and development) and competitive advantage. Furthermore, there are schemes that firms can employ to reduce taxes legally and this is necessarily dependent on proper tax planning and advisory.
3. Resources or Capabilities
This factor has a huge impact on the strategic move to diversify. Assessing resources or capabilities helps in determining the level of the firm’s financial and manpower needs, necessary in aspects of forecasting, budgeting and procurement planning. Technological readiness is another consideration. These tests have to be taken into account to also ensure that coherence to quality standards and business objectives would still be achieved along with diversification.
Geographic diversification as a growth strategy has been long adopted by many organizations, some of which resulted in success while others have failed. As Warren Buffett once said, “In the business world, the rearview mirror is always clearer than the windshield.” To look into the future entails risks and uncertainties. But Buffet further said this: “Never invest in a business you cannot understand.”, much to prove that notwithstanding the risks, we can win at investing – through a grasp of informed business knowledge or even professional help.
CRESCO Accounting Limited is a diversified CPA firm, operating in Dubai, UAE, Philippines, and Seychelles. Our results suggest that diversification improves firms’ financial performance but still there is a need of proper management of diversification decisions as excessive diversification can lead to a decrease in firms’ financial performance. There is a need to efficiently utilize the firms’ resources to apply proper diversification strategies.
CRESCO Accounting has successfully diversified geographically, the firm is a proof of how a company can take advantage of its competence in areas of financial advisory, taxation and accounting. Learn through us, and let us guide you become well-diversified! We are conveniently located at F02-04, Oceanic House, Providence Estate, Mahé, Seychelles.