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Foundations of Multinational Financial

Management Alan Shapiro

John Wiley & Sons

Power Points byJoseph F. Greco, Ph.D.

California State University, Fullerton

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Current Asset Management and Short-

Term Financing

Chapter 19

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INTERNATIONAL CASH MANAGEMENT

I. INTERNATIONAL CASH MANAGEMENTA. Seven Key Areas:

1. Organization2. Collection/Fund Disbursement3. Interaffiliate Payments Netting4. Excess-Funds Investment5. Optimal Global Cash Balances6. Cash Planning/Budgeting7. Bank Relations

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INTERNATIONAL CASH MANAGEMENT

B. Goals of an International Cash Manager

1. Quick/efficient cash control2. Optimal conservation/usage

C.Organization: Centralize1. Advantages:

a. Efficient liquidity levelsb. Enhanced profitabilityc. Quicker headquarter

action

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INTERNATIONAL CASH MANAGEMENT

1. Advantages (con’t)d. Decision making

enhancede. Better volume currency

quotesf. Greater cash

managementexpertise

g. Less political risk

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INTERNATIONAL CASH MANAGEMENT

D. Collection/Disbursement of Funds1. Key Element: Accelerate collections2. Acceleration Methods:

a. Cable remittancesb. Mobilization centersc. Lock boxesd. Electronic fund transfers

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INTERNATIONAL CASH MANAGEMENT

3. Methods to Expedite Cash Payments

a. Cable remittancesb. Establish accounts in

client’s bankc. Negotiate with banks

- obtain value dating

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INTERNATIONAL CASH MANAGEMENT

E. Payments Netting1. Definition:

offset payments of affiliate receivables/payables so that net amounts only are transferred.2. Create Netting Center

a. a subsidiary set up in a location

with minimal exchange controls

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INTERNATIONAL CASH MANAGEMENT

2. Netting Centers (con’t)b. Coordinate interaffiliate

payment flowsc. Center’s value is a direct

functionof transfer volume.

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INTERNATIONAL CASH MANAGEMENT

F. Excess Funds Investment1. Major task:

a. determine minimum cashbalances

b. short-term investment ofexcess balances

2. Requirements:a. Forecast of cash needsb. Knowledge of minimum

cash position

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INTERNATIONAL CASH MANAGEMENT

3. Investment Selection Criteria:a. Government regulationsb. Market structurec. Foreign tax laws

G. Optimal Global Cash Balances1. Establish centrally managed

cashpool

2. Require affiliates to hold minimum

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INTERNATIONAL CASH MANAGEMENT

3. Benefits of Optimal Cash Balances

a. Less borrowing ncededb. More excess fund

investmentc. Reduced internal

expensed. Reduced currency

exposure

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INTERNATIONAL CASH MANAGEMENT

I. Bank RelationsA. Good Relations Will Avoid

1. Lost interest income2. Overpriced services3. Redundant services

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INTERNATIONAL CASH MANAGEMENT

2. Common Bank Relations Problems

a. Too many banksb. High costs

such as compensating balances

c. Inadequate reportingd. Excessive clearing

delays

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ACCOUNTS RECEIVABLE MANAGEMENT

II. ACCOUNTS RECEIVABLE MANAGEMENT

A. Trade Creditextended in anticipation of

profit by1. expanded sales volume2. retaining existing

customers

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ACCOUNTS RECEIVABLE MANAGEMENT

B. Credit Terms Should Consider1. Sales force2. Adjusting bonuses for cost

of credit sales.

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INVENTORY MANAGEMENT

III. INVENTORY MANAGEMENTA. Problems:

Seem to be more difficult due to

1. Long,variable transits2. Lengthy customs

procedures

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INVENTORY MANAGEMENT

B. Production Location/Inventory Control

1. Overseas locationmay lead to higher inventory carrying costs due toa. larger amounts of work-

in-process

b. more finished goods

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INVENTORY MANAGEMENT

C. Advanced Inventory Purchases1. Usually where there are no

forward hedges available2. Another hedging method:

advance inventory purchases of

imported items, i.e. inventory stockpiling.

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INVENTORY MANAGEMENT

d. Reason for Stockpiling:greater risk of delay

e. Solution to higher carrying costs:

Adjust affiliate’s profit margins

to reflect added costs.

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SHORT-TERM FINANCING

IV. SHORT-TERM FINANCINGA. Strategy

1. Identify: key factors2. Formulate/evaluate:

objectives3. Describe: available

options4. Develop a methodology:

to calculate/compare costs

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SHORT-TERM FINANCING

B. Key Factors1. Deviations from Int’l Fisher

Effect?a. If yes

trade-off required between

cost and exchange riskb. If no

costs are same everywhere

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SHORT-TERM FINANCING

2. Exchange Riska. Offset foreign assets with

foreign liabilitiesb. Borrow where no

exposureincreases exchange risk

3. Firm’s Risk Aversiondirect relation to price

incurred to reduce exposure

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SHORT-TERM FINANCING

4. Does Interest Rate Parity Hold?a. Yes. Currency is irrelevant.b. No. Cover costs may differ-added risk may mean theforward premium/discountdoes not offset interest ratedifferentials.

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SHORT-TERM FINANCING

5. Political Risk: If high, a. MNCs should

1.) maximizelocal financing.

2.) Faced with confiscation or currency controls,fewer assets at risk

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SHORT-TERM FINANCING OBJECTIVES

C.Short-Term Financing Objectives1. Four Possible Objectives:

a. Minimize expected cost.b. Minimize risk without

regardto cost.

c. Trade off expected cost and

systematic risk.d. Trade off expect cost and

total risk.

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SHORT-TERM FINANCING OBJECTIVES

D. Short-Term Financing Options1. Three Possibilities

a. Intercompany loansb. Local currency loansc. Euro market

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SHORT-TERM FINANCING OBJECTIVES

2. Local Currency Financing: Bank Loans

a. Short-term in naturerole of cleanup clause

b. Forms1.) Term loans2.) Line of credit3.) Overdrafts4.) Revolving Credit5.) Discounting

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EFFECTIVE INTEREST RATE

3. Calculating Interest Costsa. Effective interest rate

(EIR): most efficient measure of cost

b. Basic formula:

EIR = Annual Interest

Paid Funds Received

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COMMERCIAL PAPER

4. Commercial Papera. Definition:

short-term unsecured promissorynote generally sold by large MNCson a discount basis.

b. Standard maturitiesc. Bank fees charged for:

1.) Backup line of credit2.) Credit rating service