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InternationalCashManagement21ChapterSouth-Western/ThomsonLearning©2003C21-2ChapterObjectives•Toexplainthedifferencebetweenasubsidiaryperspectiveandaparentperspectiveinanalyzingcashflows;•Toexplainthevarioustechniquesusedtooptimizecashflows;•Toexplaincommoncomplicationsinoptimizingcashflows;and•Toexplainthepotentialbenefitsandrisksofforeigninvestments.C21-3CashFlowAnalysis:SubsidiaryPerspective•Themanagementofworkingcapitalhasadirectinfluenceontheamountandtimingofcashflow:¤inventorymanagement¤accountsreceivablemanagement¤cashmanagement¤liquiditymanagementC21-4SubsidiaryExpenses•Internationalpurchasesofrawmaterialsorsuppliesaremorelikelytobedifficulttomanagebecauseofexchangeratefluctuations,quotas,etc.•Ifthesalesvolumeishighlyvolatile,largercashbalancesmayneedtobemaintainedinordertocoverunexpectedinventorydemands.CashFlowAnalysis:SubsidiaryPerspectiveC21-5SubsidiaryRevenue•Internationalsalesaremorelikelytobevolatilebecauseofexchangeratefluctuations,businesscycles,etc.•Loosercreditstandardsmayincreasesales(accountsreceivable),thoughoftenattheexpenseofslowercashinflows.CashFlowAnalysis:SubsidiaryPerspectiveC21-6SubsidiaryDividendPayments•Forecastingcashflowswillbeeasierifthedividendpaymentsandfees(royaltiesandoverheadcharges)tobesenttotheparentareknowninadvanceanddenominatedinthesubsidiary’scurrency.CashFlowAnalysis:SubsidiaryPerspectiveC21-7SubsidiaryLiquidityManagement•Afteraccountingforallcashoutflowsandinflows,thesubsidiarymusteitherinvestitsexcesscashorborrowtocoveritscashdeficiencies.•Ifthesubsidiaryhasaccesstolinesofcreditandoverdraftfacilities,itmaymaintainadequateliquiditywithoutsubstantialcashbalances.CashFlowAnalysis:SubsidiaryPerspectiveC21-8CentralizedCashManagement•Whileeachsubsidiaryismanagingitsownworkingcapital,acentralizedcashmanagementgroupisneededtomonitor,andpossiblymanage,theparent-subsidiaryandintersubsidiarycashflows.•Internationalcashmanagementcanbesegmentedintotwofunctions:¤optimizingcashflowmovements,and¤investingexcesscash.C21-9CashFlowoftheOverallMNCSubsidiaryShort-TermSecuritiesLong-TermProjectsParentCashDividendsSourcesofDebtStock-holdersSubsidiaryFundsforSuppliesInterest&/orPrincipalLoansorInvestmentFees&EarningsExcessCashFees&EarningsExcessCashInterest&/orPrincipalLoansorInvestmentPurchaseSaleLong-TermInvestmentReturnonInvestmentLoansRepaymentNewIssuesC21-10CentralizedCashManagement•ThecentralizedcashmanagementdivisionofanMNCcannotalwaysaccuratelyforecasttheeventsthatmayaffectparent-subsidiaryorintersubsidiarycashflows.•Itshould,however,bereadytoreacttoanyeventbyconsidering¤anypotentialadverseimpactoncashflows,and¤howtoavoidsuchadverseimpacts.C21-11TechniquestoOptimizeCashFlowsAcceleratingCashInflows•Themorequicklythecashinflowsarereceived,themorequicklytheycanbeinvestedorusedforotherpurposes.•Commonmethodsincludetheestablishmentoflockboxesaroundtheworld(toreducemailfloat)andpreauthorizedpayments(directchargingofacustomer’sbankaccount).C21-12MinimizingCurrencyConversionCosts•Nettingreducesadministrativeandtransactioncoststhroughtheaccountingofalltransactionsthatoccuroveraperiodtodetermineonenetpayment.•Abilateralnettingsysteminvolvestransactionsbetweentwounits,whileamultilateralnettingsystemusuallyinvolvesmorecomplexinterchanges.TechniquestoOptimizeCashFlowsC21-13IntersubsidiaryPaymentsMatrixCanadaFranceJapanSwitzerlandU.S.Canada––40902040France60––306050Japan10030––2030Switzerland105010––50U.S.10602020––ThousandsofUS$OwedtoSubsidiaryin:PaymentsMatrixCanadaFranceJapanSwitzerlandU.S.Canada––001030France20––0100Japan100––1010Switzerland000––30U.S.01000––NetThousandsofUS$Owed:NettingScheduleC21-14ManagingBlockedFunds•Agovernmentmayrequirethatfundsremainwithinthecountryinordertocreatejobsandreduceunemployment.•TheMNCshouldthenreinvesttheexcessfundsinthehostcountry,adjustthetransferpricingpolicy(suchthathigherfeeshavetobepaidtotheparent),borrowlocallyratherthanfromtheparent,etc.TechniquestoOptimizeCashFlowsC21-15ManagingIntersubsidiaryCashTransfers•Asubsidiarywithexcessfundscanprovidefinancingbypayingforitssuppliesearlierthanisnecessary.Thistechniqueiscalledleading.•Alternatively,asubsidiaryinneedoffundscanbeallowedtolagitspayments.Thistechniqueiscalledlagging.TechniquestoOptimizeCashFlowsC21-16ComplicationsinOptimizingCashFlowsCompany-RelatedCharacteristics¤Whenasubsidiarydelaysitspaymentstotheothersubsidiaries,theothersubsidiariesmaybeforcedtoborrowuntilthepaymentsarrive.GovernmentRestrictions¤Somegovernmentsmayprohibittheuseofanettingsystem,orperiodicallypreventcashfromleavingthecountry.C21-17CharacteristicsofBankingSystems¤TheabilitiesofbankstofacilitatecashtransfersforMNCsmayvaryamongcountries.¤Thebankingsystemsindifferentcountriesusuallydiffertoo.ComplicationsinOptimizingCashFlowsC21-18InvestingExcessCash•Excessfundscanbeinvestedindomesticorforeignshort-termsecurities,suchasEurocurrencydeposits,bills,andcommercialpapers.•Sometimes,foreignshort-termsecuritieshavehigherinterestrates.However,firmsmustalsoaccountforthepossibleexchangeratemovements.C21-19Short-TermInterestRates05101