International Cash Management

Presented By: Sushil Regmi MBA (Finance) (Finance)

Flow of presentation Objectives Centralized

perspective of cash flow analysis Benefit of centralised cash system  Techniques to optimize cash flows Accelerating cash inflows Managing Blocked Funds Leading and lagging Netting Minimizing tax on cash flow Investing excess cash

OBJECTIVES  To

manage and control the cash resources of the company as quickly and efficiently as possible. Achieve the optimum utilization and conservation of the funds.  The first one can be achieved by:  Improving

the cash collections & disbursements  By accurate and timely forecast of cash flow pattern  The

second objective by:

 Making

money available when and where it is needed  Minimising the required level of cash balances  Increasing the risk adjusted return on funds that can be invested

OBJECTIVES Minimise

the currency exposure risk. Minimise the country and political risk. Minimise the overall cash requirement of the company as a whole without disturbing the smooth operation of subsidiary or its affiliate. Minimise the transaction costs. Full benefits of economies of scale as well as the benefit of superior knowledge. 

CENTRALIZED PERSPECTIVE OF CASH FLOW ANALYSIS Centralised

cash management group is needed to monitor and manage the parent subsidiary and intersubsidiary cash flows. Centralisation refers to centralisation of  information, reports and more specifically the decision making process as to cash mobilization, movement and investment outlets.  This role is critical since it can often benefit individual subsidiaries in need of funds or overly exposed to exchange rate risk.

cash system Maintaining

minimum cash balance during the

year. Helping the centre to generate maximum possible return by investing all cash resources optimally.  Judiciously manage the liquidity requirements of centre. Helping centre to take complete advantage of  netting. Optimally utilizing the various hedging strategies to minimize the foreign exchange exposure. Achieve max. utilization of transfer pricing mechanism to enhance the profitability and

Cash flow of overall mnc Interest and/or principal on excess cash invested by subsidiary Loans



Short term securities Funds recd. From sales of securities

Subsidiary 1

      r       o       s         f       e         i       s         l         d       p         n       p         u       u         F       s

E    x   b  e   c  e  s   i  n   s   c   v  e   a s   s  t   h   e  d    t  o  

Long term investment

Long term projects

Parent

    h   s   a c   e  d   s    t   s   e  s   c  e    v    x     E   o    n i    t   e     b

Subsidiary 2

Purchase of securities

Fees and part Of earnings

Repayment on loans Loans

Sources of debt

Funds paid by new Stock issues

Sources of debt Loans Interest and/or principal on

Cash dividends

 Techniques to optimize cash flows Accelerating

cash inflows Managing blocked funds Leading and lagging Netting Minimizing tax on cash flow

Accelerating cash inflows  The

more quickly the inflows are received, the more quickly they can be invested or used for other purposes MNC may establish lockboxes around the world Preauthorized payment, which allows a corporation to charge a customer s bank account up to some limit Online payment solution ’

Managing Blocked Funds In

some cases, the host country may block funds that the subsidiary attempts to send to the parent.  The parent may instruct the subsidiary to obtain financing from a local bank rather than from the parent Prior to making a capital investment in a foreign subsidiary, the parent firm should investigate the potential of future fund blockage.  The various methods for moving blocked funds are transfer pricing strategies, leading and

LEADING AND LAGGING Used

to optimise cash flow movements by adjusting the timing of payment to reflect expectations about future currency movements. MNCs can accelerate (lead) the timing of  foreign currency payments by modifying the credit terms extended by one unit to another. It is adopted by MNCs in order to reduce foreign exchange exposure or to increase available working capital.

Co.

generally accelerate the hard currency payables and delay the payments of soft currency payables so as to reduce foreign exchange exposure. It is also a means of shifting liquidity among affiliates and the technique depends on opportunity cost of both the paying unit and the receipient.

NETTING Netting,

is a technique of optimising cash flow movements with the joint effort of  subsidiaries. It involves the reduction of administration and transaction costs that result from currency conversion. Netting is of two type: Bilateral

netting system and multilateral netting system

BILATERAL NETTING It

involves transaction between the parent and a subsidiary or between two subsidiaries.



MULTILATERAL NETTING



Under

this system, each affiliate nets all its interaffiliate receipts against all its disbursements. It then transfer or receives the balance, depending on whether it is a net receiver or a payer.

Bilateral netting: an Example Bilateral Netting would reduce the number of  foreign exchange transactions by half:



$ 1$ 2$ 3 0 5 5

$4 0$ 2 0 $2 5

$2 $1 $3 0 0 0 $1 $1 5 0 $2 $ $1 3 0 0 0

$60

$ 3 $0 1$04 0

Multilateral Netting: an Example

Consider simplifying the bilateral netting with multilateral netting:



$ 1$ 01 0 $$11$$21 55 50

4 $ 2 $$ 4 $03 4 00 0

$1 5 $1 5

$1 0

$1 0

$10

Netting with Central Depository

Some firms use a central depository as a cash pool to facilitate funds mobilization and reduce the chance of misallocated funds.



$15

$55 Central deposito ry

$40

Netting with Central Depository

Some firms use a central depository as a cash pool to facilitate funds mobilization and reduce the chance of misallocated funds.



$15

$55 Central deposito ry

$40

Minimizing tax on cash flow MNC

must consider the tax consequences of  altering its cash flow Another possible strategy to deal with such high taxation is to adjust the transfer pricing policy Some limitations on an adjustment in the transfer pricing policy Financing strategy may be used to deal with high taxation Establishment of a reinvoicing center

Investing excess cash  Treasury

Bills Govt. agency notes Demand deposits  Time deposits Deposits with NBFCs Certificate of deposits Commercial paper  Temporary corporate loans 

BIBLIOGRAPHY International

Financial Management • EUN / RESNICK 

International

Financial Management • MADHU VIZ

Multinational

Financial Management • ALAN C. SHAPIRO