(b) Annual and Total Requirements. Frequently, a negotiating period is needed dur-
ing which the corporate level negotiates with the division, the division with the re-
gion, and, finally, the region with the affiliates what capital projects will eventually
yield the desired objectives. To enable the affiliates to do the necessary preparatory
work, two dimensions of all proposed capital projects are considered: the total cost
of the project and the timing of cash expenditures to complete the project. For pur-
poses of capital budgeting, the total cost, which may stretch out over several years,
is included; for purposes of cash budgeting, the annual funds required are essential
to determine the annual overall financing aspects.
(c) Interface between Objectives and Capital Budget. It is desirable, but not ab-
solutely necessary, to prepare objectives for a three- or five-year period in sufficient
detail, that is, stating requirements for each major program or project, so that the first
forward year’s data can—and frequently do—form the capital budget for that year.
The remaining years of the objectives will then represent preliminary indications,
which will be fleshed out in subsequent cycles.
(d) Determination of Exchange Rates. The reason for making Year 1 of the objec-
tives the capital budget for Year 1 is the complexity caused by the need to set the ex-
change rates for each country’s use in the objectives and capital budgeting process.
It is recommended that the exchange rates be fixed at the beginning of that process;
otherwise, a lot of time will be consumed in discussions (arguments) between a re-
gion and an affiliate as to which rate is to be used for what purpose. Precise rates fluc-
tuate and frequently change daily. We shall see how we can cope with the reality of
floating exchange rates when we discuss the control aspects of budgeting.
(e) Capital Budgets Illustration. We are now at the point where we want to put to-
gether the objectives and, within the objectives, details of the first forward year’s cap-
ital budgets for Affiliate B in Region A. Let us assume that “appropriate” levels were
agreed upon between the parent company and the division, as well as between the di-
vision and Region A. The levels for each affiliate are then negotiated between Region
A and its affiliates. The end result of negotiations between the various management
levels is an overall budget of PC 10,000 for Affiliate B, based on an exchange rate of
PC 1 = LC 2 (see Exhibit 25.3).
(i) Functional Elements. The functional elements of such a budget would then be
hammered out between Region A and Affiliate B, with the affiliate putting together
detailed project-by-project proposals that may or may not add up to the required LC
20,000 level. This bottom-up approach frequently leads to changes in the total affili-
ate’s budget, in which case further negotiations up the line take place and the corpo-
ration’s overall objectives, capital budget, and related cash flow projections are
changed. In other situations, an affiliate may be requested to come forward with proj-
ects that, with the possible addition of a contingency amount, will add up to the pre-
determined total.
To complete the illustration, Exhibit 25.3 also shows the full objectives cycle for
Affiliate B. The data for 20X1 and 20X2 are worked out similarly to the procedures
described in the preceding paragraph, except that sometimes a summary rather than
a project-by-project approach is used. It should be observed that, in determining ob-
jectives levels, we maintained the exchange rate at PC 1 = LC 2 for the three forward
25 • 6 MULTINATIONAL BUDGETING AND CONTROL SYSTEMS