Chapter 15 International Cash Management

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Chapter 15 International Cash Management
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Cash Flow Analysis Subsidiary Perspective(1)

• The management of working capital
• Difficulties of forecasting future outflow
  payments if its purchases are international
• Imported goods from another country could be
  restricted by the importers government
• Outflow payments for supplies will be influenced
  by future sales

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Cash Flow Analysis Subsidiary Perspective(2)

• It is important to focus on cash inflows due to
  sales rather than on sales themselves
• The subsidiary will find itself with either
  excess or deficient cash. Thus, it will
  periodically need either invest its cash or
  borrow to cover its cash deficiencies
• Liquidity management is a crucial component of a
  subsidiarys working capital management

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Centralized Cash Flow Management

• Each subsidiary is more concerned with its own
  operations than with the overall operations of
  the MNC
• A centralized cash management group may need to
  monitor and possibly manage the parent subsidiary
  and inter-subsidiary cash flows
• Optimizing cash flow movement VS investing excess
  cash

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Techniques to optimize cash flows

• Accelerating cash inflows
• Minimizing currency conversion costs
• Minimizing the tax on cash flow
• Managing blocked funds
• Managing inter-subsidiary cash transfers

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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 customers bank account up to some
  limit

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Minimizing currency conversion costs

• Netting, be implemented with the joint effort of
  subsidiaries or by the centralized cash
  management group
• Bilateral netting system and multilateral netting
  system
• There can be some limitations to multilateral
  netting due to foreign exchange controls

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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

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Managing Blocked Funds

• The subsidiary may be instructed by the MNC to
  set up a research and development division
• The parent may instruct the subsidiary to obtain
  financing from a local bank rather than from the
  parent
• Host a corporate meeting in local place

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Inter-subsidiary cash transfers

• The subsidiary could provide financing by paying
  its supplies earlier than necessary
• The MNC could provide financing by allowing its
  subsidiary to lag its payments
• The leading or lagging strategy can make
  efficient use of cash and therefore reduce debt