INTERNATIONAL CASH MANAGEMENT

Presented By:Sushil Regmi

MBA (Finance)

Flow of presentationObjectivesCentralized perspective of cash flow analysisBenefit of centralised cash systemTechniques to optimize cash flowsAccelerating cash inflowsManaging Blocked FundsLeading and laggingNettingMinimizing tax on cash flowInvesting excess cash

OBJECTIVESTo 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 & disbursementsBy accurate and timely forecast of cash flow pattern

The second objective by:Making money available when and where it is neededMinimising the required level of cash balancesIncreasing the risk adjusted return on funds that can be

invested

OBJECTIVESMinimise 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 ANALYSISCentralised 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.

Benefit of centralised cash systemMaintaining 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 growth.

Cash flow of overall mnc

Subsidiary 1

Subsidiary 2

Parent

Short term securities

Long term projects

Sources of debt

Sources of debt

Purchase of securities

Interest and/or principal on excess cash invested by subsidiary

Loans

Fu

nd

s fo

r su

pp

lies

Funds recd. From sales of securitiesLong term

investment

Loans

Repayment on loans

Funds paid by newStock issues

Cash dividends

Loans

Interest and/or principal on excess cash invested by subsidiary

Fees and partOf earnings

Excess cash to

be invested

Exces

s ca

sh

tobe

inve

sted

Techniques to optimize cash flowsAccelerating cash inflowsManaging blocked fundsLeading and laggingNettingMinimizing tax on cash flow

Accelerating cash inflowsThe 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 FundsIn 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 lagging , direct negotiations.

LEADING AND LAGGINGUsed 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 NETTINGIt involves transaction between the parent

and a subsidiary or between two subsidiaries.

MULTILATERAL NETTINGUnder 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 ExampleBilateral Netting would reduce the number of

foreign exchange transactions by half:

$10

$35

$40

$30

$20

$40

$30

$20$30

$20$30

$10

$40$30$10

$30

$20

$60

$10

$35

$25

$60

$40$20

$25

$10$2

5

$10

$15

$10

Multilateral Netting: an ExampleConsider simplifying the bilateral netting with

multilateral netting:

$25

$10

$20

$10

$10$10

$15

$10

$10

$30

$15 $10

$10

$40

$15

$15

$40

$40

$15

Netting with Central DepositorySome firms use a central depository as a cash

pool to facilitate funds mobilization and reduce the chance of misallocated funds.

$15

$40

Central deposit

ory

$55

Netting with Central DepositorySome firms use a central depository as a cash

pool to facilitate funds mobilization and reduce the chance of misallocated funds.

$15

$40

Central deposit

ory

$55

Minimizing tax on cash flowMNC must consider the tax consequences of

altering its cash flowAnother 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 BillsGovt. agency notesDemand depositsTime depositsDeposits with NBFCsCertificate of depositsCommercial paperTemporary corporate loans

BIBLIOGRAPHYInternational Financial Management

• EUN / RESNICK

International Financial Management• MADHU VIZ

Multinational Financial Management• ALAN C. SHAPIRO