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1MultinationalFinancialManagementAlanShapiro7thEditionJ.Wiley&SonsPowerPointsbyJosephF.Greco,Ph.D.CaliforniaStateUniversity,Fullerton2CHAPTER19CURRENTASSETMANAGEMENTANDSHORT-TERMFINANCING3CHAPTEROVERVIEWI.INTERNATIONALCASHMANAGEMENTII.ACCOUNTSRECEIVABLEMANAGEMENTIII.INVENTORYMANAGEMENTIV.SHORT-TERMFINANCING4I.INTERNATIONALCASHMANAGEMENTI.INTERNATIONCASHMANAGEMENTA.SevenKeyAreas:1.Organization2.Collection/FundDisbursement3.InteraffiliatePaymentsNetting4.Excess-FundsInvestment5.OptimalGlobalCashBalances6.CashPlanning/Budgeting7.BankRelations5INTERNATIONALCASHMANAGEMENTB.GoalsofanInternationalCashManager1.Quick/efficientcashcontrol2.Optimalconservation/usageC.Organization:Centralize1.Advantages:a.Efficientliquiditylevelsb.Enhancedprofitabilityc.Quickerheadquarteraction6INTERNATIONALCASHMANAGEMENT1.Advantages(con’)d.Decisionmakingenhancede.Bettervolumecurrencyquotesf.Greatercashmanagementexpertiseg.Lesspoliticalrisk7INTERNATIONALCASHMANAGEMENTD.Collection/DisbursementofFunds1.KeyElement:Acceleratecollections2.AccelerationMethods:a.Cableremittancesb.Mobilizationcentersc.Lockboxesd.Electronicfundtransfers8INTERNATIONALCASHMANAGEMENT3.MethodstoExpediteCashPaymentsa.Cableremittancesb.Establishaccountsinclient’sbankc.Negotiatewithbanks-obtainvaluedating9INTERNATIONALCASHMANAGEMENTE.PaymentsNetting1.Definition:offsetpaymentsofaffiliatereceivables/payablessothatnetamountsonlyaretransferred.2.CreateNettingCentera.asubsidiarysetupinalocationwithminimalexchangecontrols10INTERNATIONALCASHMANAGEMENT2.NettingCenters(con’t)b.Coordinateinteraffiliatepaymentflowsc.Center’svalueisadirectfunctionoftransfervolume.11INTERNATIONALCASHMANAGEMENTF.ExcessFundsInvestment1.Majortask:a.determineminimumcashbalancesb.short-terminvestmentofexcessbalances2.Requirements:a.Forecastofcashneedsb.Knowledgeofminimumcashposition12INTERNATIONALCASHMANAGEMENT3.InvestmentSelectionCriteria:a.Governmentregulationsb.Marketstructurec.ForeigntaxlawsG.OptimalGlobalCashBalances1.Establishcentrallymanagedcashpool2.Requireaffiliatestoholdminimum13INTERNATIONALCASHMANAGEMENT3.BenefitsofOptimalCashBalancesa.Lessborrowingneededb.Moreexcessfundinvestmentc.Reducedinternalexpensed.Reducedcurrencyexposure14INTERNATIONALCASHMANAGEMENTH.BankRelations1.GoodRelationsWillAvoida.Lostinterestincomeb.Overpricedservicesc.Redundantservices15INTERNATIONALCASHMANAGEMENT2.CommonBankRelationsProblemsa.Toomanybanksb.Highcostssuchascompensatingbalancesc.Inadequatereportingd.Excessiveclearingdelays16II.ACCOUNTSRECEIVABLEMANAGEMENTII.ACCOUNTSRECEIVABLEMANAGEMENTA.TradeCreditextendedinanticipationofprofitby1.expandedsalesvolume2.retainingexistingcustomers17ACCOUNTSRECEIVABLEMANAGEMENTB.CreditTermsShouldConsider1.Salesforce2.Adjustingbonusesforcostofcreditsales.18III.INVENTORYMANAGEMENTA.Problems:Seemtobemoredifficultdueto1.Long,variabletransits2.Lengthycustomsprocedures19INVENTORYMANAGEMENTB.ProductionLocation/InventoryControl1.Overseaslocationmayleadtohigherinventorycarryingcostsduetoa.largeramountsofwork-in-processb.morefinishedgoods20INVENTORYMANAGEMENTC.AdvanceInventoryPurchases1.Usuallywheretherearenoforwardhedgesavailable2.Anotherhedgingmethod:advanceinventorypurchasesofimporteditems,i.e.inventorystockpiling.21INVENTORYMANAGEMENTd.ReasonforStockpiling:greaterriskofdelaye.Solutiontohighercarryingcosts:Adjustaffiliate’sprofitmarginstoreflectaddedcosts.22IV.SHORT-TERMFINANCINGIV.SHORT-TERMFINANCINGA.Strategy1.Identify:keyfactors2.Formulate/evaluate:objectives3.Describe:availableoptions4.Developamethodology:tocalculate/comparecosts23SHORT-TERMFINANCINGB.KeyFactors1.DeviationsfromInt’lFisherEffect?a.Ifyestrade-offrequiredbetweencostandexchangeriskb.Ifnocostsaresameeverywhere24SHORT-TERMFINANCING2.ExchangeRiska.Offsetforeignassetswithforeignliabilitiesb.Borrowwherenoexposureincreasesexchangerisk3.Firm’sRiskAversiondirectrelationtopriceincurredtoreduceexposure25SHORT-TERMFINANCING4.DoesInterestRateParityHold?a.Yes.Currencyisirrelevant.b.No.Covercostsmaydiffer-addedriskmaymeantheforwardpremium/discountdoesnotoffsetinterestratedifferentials.26SHORT-TERMFINANCING5.PoliticalRisk:Ifhigh,a.MNCsshould1.)maximizelocalfinancing.2.)Facedwithconfiscationorcurrencycontrols,fewerassetsatrisk.27SHORT-TERMFINANCINGC.Short-TermFinancingObjectives1.FourPossibleObjectives:a.Minimizeexpectedcost.b.Minimizeriskwithoutregardtocost.c.Tradeoffexpectedcostandsystematicrisk.d.Tradeoffexpectcostandtotalrisk.28SHORT-TERMFINANCINGD.Short-TermFinancingOptions1.ThreePossibilitiesa.Inter-companyloansb.Localcurrencyloansc.Euromarket29SHORT-TERMFINANCING2.LocalCurrencyFinancing:BankLoansa.Short-terminnatureroleofcleanupclauseb.Forms1.)Termloans2.)Lineofcredit3.)Overdrafts4.)RevolvingCredit5.)Discounting30SHORT-TERMFINANCING3.CalculatingInterestCostsa.Effectiveinterestrate(EIR):mostefficientmeasureofcostb.Basicformula:EIR=AnnualInterestPaidFundsReceived31SHORT-TERMFINANCING4.CommercialPapera.Definition:short-termunsecuredpromissorynotegenerallysoldbylargeMNCsonadiscountbasis.b.Standardmaturitiesc.Bankfeeschargedfor:1.)B