European Financial Aspects

Forplay, Inc. , is about to become a reality on the European market. Our company will base its distribution on strategic alliances with local mail order companies, while starting a global ad campaign targeted to an audience age 18 to 45. While we don”t expect too many difficulties in converting and repatriating our funds, the financial aspects of this operation will still have to face the upcoming European monetary integration. The new currency — the euro – could significantly impact the way international business is conducted.

In January 1996, Andersen Consulting surveyed 169 companies throughout the European Union, finding that “nearly three quarters felt that deeper integration in the form of European monetary union (EMU) would enhance the single market and bring further benefits — such as a more stable currency, lower inflation, lower interest rates, cost savings, efficiency improvements, a more competitive European Union (EU), and increased foreign investment. ” There are benefits for companies outside the EU too.

Business with Europe will be easier, and investment choices simplified through increased visibility and comparability of prices. Medium- and small-sized companies like Forplay, Inc. , will have less trouble opening a bridgehead into an enlarged unified market, with fewer financial risks. However, there are also many uncertainties. For example, which countries will join? Member states must meet criteria for economic convergence, and it is not certain how strictly these criteria will be enforced.

Sluggish economic performance is giving finance ministers little room to maneuver. In some countries, notably the United Kingdom, a significant portion of the political establishment is hostile to the whole process, while in other countries, notably Germany, there is a reluctance to relinquish a strong national currency. Adjustments for the new currency must be made between the start of 1999 and the start of 2002. As a business, we must begin planning now to minimize the cost of changing our information systems and administrative operations and address the legal issues.

All software implementations will have to be consistent with the changeover needs, so decisions made in the IT field will be of paramount importance. The migration to the euro will be of concern to risk managers in the world’s major banks. Long term, there are many inherent advantages to EMU for controlling financial risk, although there is a chance of “backing the wrong horse” by adopting a technical solution that is rapidly made obsolete by the market, technological advances, or unexpected legislation.

In the short term, uncertainty and market volatility mean increased risk. According to Bengt Bengtsson, SAS Institute European product manager for risk management solutions, “Companies should take this opportunity to review and update their treasury operations, foreign exchange, and interest rate management. Flexibility in risk controlling systems and adequate hedging mechanisms will be vital. Liquidity risk will also come high on the agenda as new products and funding possibilities (bonds, for example) become available in the euro.

One of the keys to success will be the separation of risk controlling functions from day-to-day trading activities through a risk warehouse strategy. ” For a while at least, Forplay, Inc. will have to operate some form of dual accounting, with consequent additional burdens on our corporate chief financial officers (CFOs). In the meantime, CFOs will need maximum flexibility within their ledger accounting systems and their financial consolidation and reporting systems, so they should take advantage of the introduction of the euro to review both. Two types of organizations face challenges,” says Richard King, SAS Institute European product marketing coordinator.

“The first is those with more than one type of transactional ledger system. They will need to consolidate and report in two currencies, based on data from several incompatible sources. Consequently they will need a solution that allows them to look at all relevant dimensions from any perspective, instantly. “The second is any organization that has standardized on a single type of transactional ledger system but nevertheless lacks flexibility when it comes to financial reporting,” adds King.

CFO Vision from SAS Institute, which supports all ledger systems, gives full flexibility in reporting (including multiple currencies concurrently) while protecting existing investments. For us as marketers, the transition to the Euro also raises awkward issues that may seem insoluble to anyone exporting to the EU. For example, should prices be expressed in euros, national currencies, or both? In addition, even though our prices are extremely competitive, for many products there is a marked difference in pricing policies within different EU countries.

With the introduction of the euro, prices will be more transparent and such differences more difficult to maintain. Forplay, Inc. should therefore be investing in market research and database marketing to formulate pricing and marketing strategies now to avoid loss of market share and secure the benefits of operating in a single market. Preparation will mean everything as further developments in the deployment of the euro unfold. A keen understanding of current systems, a strong business plan, and flexible technology will mean continued business success — in any language.