CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING

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Chapter 19

• CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING

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PART 1International Cash Management
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INTERNATIONAL CASH MANAGEMENT

• I. INTERNATIONAL CASH MANAGEMENT
• A. Seven Key Areas Involve Issues about
• 1. Organization
• 2. Collection/Fund Disbursement
• 3. Interaffiliate Payments
• 4. Investment of Excess Funds
• 5. Optimal Global Cash Balances
• 6. Cash Planning/Budgeting
• 7. Bank Relations

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INTERNATIONAL CASH MANAGEMENT

• B. Goals of an International Cash Manager
  similar to domestic manager
• 1. Quick and efficient cash control
• 2. Optimal conservation and usage
• response

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INTERNATIONAL CASH MANAGEMENT

• Issue (1) Centralize Organization
• 1. Advantages
• a. Efficient liquidity levels
• b. Enhanced profitability
• c. Quicker headquarter

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INTERNATIONAL CASH MANAGEMENT

• 1. Advantages (cont)
• d. Decision making enhanced
• e. Better volume currency quotes
• f. Greater cash management
• expertise
• g. Less political risk

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INTERNATIONAL CASH MANAGEMENT

• Issue (2) Collection/Disbursement of Funds
• 1. Key Element Accelerate collections
• 2. Acceleration Methods
• a. Electronic fund transfers
• b. Mobilization centers

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INTERNATIONAL CASH MANAGEMENT

• 3. Methods to Expedite Cash Payments
• a. Wire cash transfers
• b. Establish accounts in clients bank
• c. Negotiate with banks
• - obtain value dating

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INTERNATIONAL CASH MANAGEMENT

• Issue (3) Interaffiliate Payments
• Use Payments Netting
• 1. Definition
• -offset payments of affiliate receivables/payables
  
• -net amounts only are transferred.

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INTERNATIONAL CASH MANAGEMENT

• 2. Create Netting Center
• a. set up a subsidiary in a location
• with minimal exchange controls
• b. Coordinate interaffiliate payment flows
• c. Netting Centers value
• a direct function of the volume of
  transfers.

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INTERNATIONAL CASH MANAGEMENT

• Issue (4) Excess Funds Investment
• 1. Major task a. determine minimum cash
• balances
• b. short-term investment of
• excess balances

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INTERNATIONAL CASH MANAGEMENT

• 2. Requirements
• a. Forecast of cash needs
• b. Knowledge of minimum
• cash position

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INTERNATIONAL CASH MANAGEMENT

• 3. Investment Selection Criteria
• a. Degree of Government regulations
• b. Market structure
• c. Leniency of Foreign tax laws

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INTERNATIONAL CASH MANAGEMENT

• Issue (5) Optimal Global Cash Balances
• 1. Establish centrally managed cash pool
• 2. Require affiliates to hold minimum
  amounts

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INTERNATIONAL CASH MANAGEMENT

• 3. Benefits of Optimal Global Cash Balances
• a. Less outside borrowing needed
• b. More excess fund for investment
• c. Reduced internal expense
• d. Reduced currency exposure

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INTERNATIONAL CASH MANAGEMENT

• Issue (6) Cash Planning and Budgeting

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INTERNATIONAL CASH MANAGEMENT

• Issue (7) Bank Relations
• 1. Good Relations Will Avoid
• a. Lost interest income
• b. Overpriced services
• c. Redundant services

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INTERNATIONAL CASH MANAGEMENT

• 2. Common Bank Relations Problems
• a. Too many banks
• b. High costs
• such as compensating balances
• c. Inadequate reporting
• d. Excessive clearing delays

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ACCOUNTS RECEIVABLE MANAGEMENT

• II. ACCOUNTS RECEIVABLE MANAGEMENT
• A. Trade Credits
• extended in anticipation of profit by
• 1. expanded sales volume
• 2. retaining existing customers

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ACCOUNTS RECEIVABLE MANAGEMENT

• B. Credit Terms Should Consider
• 1. Sales force
• customer selection criteria
• 2. Adjusting sales bonuses for cost of
  credit sales.

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INVENTORY MANAGEMENT

• III. INVENTORY MANAGEMENT
• A. Problems
• MNCs seem to have more difficulties due to
• 1. Long,variable transits
• 2. Lengthy customs procedures

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INVENTORY MANAGEMENT

• B. Issue Production Location 1. Overseas
  location may lead to higher inventory carrying
  costs due to
• a. larger amounts of work-in-
• process
• b. more finished goods
• 2. Why?

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INVENTORY MANAGEMENT

• C. Subsidiary Practice known as
• Advanced Inventory Purchases
• or
• inventory stockpiling

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INVENTORY MANAGEMENT

• D. Reason for Stockpiling
• reduce risk of shipping delays
• Results of Stockpiling
• Higher carrying costs
• F. Solution to higher carrying costs
• Adjust affiliates profit margins to reflect
  added costs.

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CHAPTER 19

• PART 2
• Short-Term Financing

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SHORT-TERM FINANCING

• IV. SHORT-TERM FINANCING
• A. Strategy
• 1. Identify 3 key factors
• 2. Formulate/evaluate objectives
• 3. Describe available options
• 4. Develop a methodology
• to calculate/compare costs

EIR The Effective Interest Rate
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SHORT-TERM FINANCING

• B. Key Factors
• 1. Deviations from Intl Fisher Effect?
• a. If yes
• trade-off required between cost and
  exchange risk
• b. If no
• costs are same everywhere

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SHORT-TERM FINANCING

• 2. Does Interest Rate Parity Hold?
• a. Yes. Currency is irrelevant.
• b. No. Cover costs may differ
• -added risk may mean the forward
  premium/discount does not offset interest rate
  differentials.

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SHORT-TERM FINANCING

• 3. Political Risk If high,
• a. MNCs should
• 1.) maximize local financing.
• 2.) Faced with confiscation or currency
  controls,
• fewer assets at risk

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SHORT-TERM FINANCING OBJECTIVES

• C. Short-Term Financing Objectives
• 1. Possible Objectives
• a. Minimize expected cost.
• b. Minimize risk without regard
• to cost.

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SHORT-TERM FINANCING OBJECTIVES

• D. Short-Term Financing Options
• 1. Three Possibilities
• a. Inter-company loans
• b. Local currency loans
• c. Euro market

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SHORT-TERM FINANCING OBJECTIVES

• 2. Local Currency Financing Bank Loans
• a. Short-term in nature
• What is the role of cleanup clause?
• b. Forms of Local Currency bank loans
• 1.) Term loans
• 2.) Line of credit
• 3.) Discounting

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EFFECTIVE INTEREST RATE

• 3. Calculating Interest Costs
• a. Effective interest rate (EIR) - most
  efficient measure of cost
• b. Basic formula
• EIR Annual Interest Paid
• Funds Received

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EFFECTIVE INTEREST RATE

• Sample Problem 1
• Pro Logic Co. receives a loan for 10,000 at
  11 interest payable at maturity at the end of
  one year. What is the EIR?
• EIR 1,100 (10,000x.11)
• 10,000 10,000
• 11

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EFFECTIVE INTEREST RATE

• Sample Problem 2 Discounting the loan
• Pro Logic Co. receives a loan for 10,000 at 11
  on a discounted basis for one year. What is the
  EIR?
• EIR 1,100 (10,000x.11)
• 8,900 10,000-1100
• 1100
• 8900
• 12.4

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EFFECTIVE INTEREST RATE

• Sample Problem 3 Compensating Balances
• Pro Logic Co. receives a loan for 10,000 at 11
  with a 15 compensating balance requirement for
  one year. What is the EIR?
• EIR 1,100 (10,000x.11)
• 8,500 10,000-1500
• 1100
• 8500
• 12.9

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EFFECTIVE INTEREST RATE

• Sample Problem 4 Compensating Balance on a
  discounted loan
• Pro Logic Co. receives a loan for 10,000 at 11
  on a discounted basis and a 15 compensating
  balance requirement for one year. What is the
  EIR?
• EIR 1,100(10,000x.11)
• 7,400(10,000-1100-1500)
• 14.9

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COMMERCIAL PAPER

• 4. Non-bank lending Commercial Paper
• a. Definition
• short-term unsecured promissory
• note generally sold by large MNCs
• on a discount basis.
• b. Standard maturities
• c. Bank fees charged for
• 1.) Backup line of credit
• 2.) Credit rating service