The document discusses international financial management and short-term cash management for multinational corporations. It covers minimizing working capital needs, raising short-term funds at low cost, deploying cash surpluses for returns, and the additional complexities of dealing in multiple currencies and locations. Centralized cash management allows for netting exposures, cash pooling, and efficiently allocating internal funds, though some cash must remain local for liquidity. Choosing funding and investment vehicles and locations requires considering costs, marketability, exchange rate risk and other factors.
The document discusses international financial management and short-term cash management for multinational corporations. It covers minimizing working capital needs, raising short-term funds at low cost, deploying cash surpluses for returns, and the additional complexities of dealing in multiple currencies and locations. Centralized cash management allows for netting exposures, cash pooling, and efficiently allocating internal funds, though some cash must remain local for liquidity. Choosing funding and investment vehicles and locations requires considering costs, marketability, exchange rate risk and other factors.
Original Description:
Original Title
Short term Financial Management in a Multinational Corporation
The document discusses international financial management and short-term cash management for multinational corporations. It covers minimizing working capital needs, raising short-term funds at low cost, deploying cash surpluses for returns, and the additional complexities of dealing in multiple currencies and locations. Centralized cash management allows for netting exposures, cash pooling, and efficiently allocating internal funds, though some cash must remain local for liquidity. Choosing funding and investment vehicles and locations requires considering costs, marketability, exchange rate risk and other factors.
The document discusses international financial management and short-term cash management for multinational corporations. It covers minimizing working capital needs, raising short-term funds at low cost, deploying cash surpluses for returns, and the additional complexities of dealing in multiple currencies and locations. Centralized cash management allows for netting exposures, cash pooling, and efficiently allocating internal funds, though some cash must remain local for liquidity. Choosing funding and investment vehicles and locations requires considering costs, marketability, exchange rate risk and other factors.
can be stated as • Minimize the working capital needs consistent with other policies • Raise short term funds at the minimum possible cost and deploy short term cash surpluses at the maximum possible rate of return consistent with the firm's risk preferences and liquidity needs
P.G.Apte International Financial Management 2
17.1 Introduction (contd.)
• In a multinational context, the added dimensions
are the multiplicity of currencies and a much wider array of markets and instruments for raising and deploying funds • Focus on cash management since it is complex because of possibility of raising and deploying cash in many currencies, many locations, and profit opportunities presented by imperfections in international money and foreign exchange markets
P.G.Apte International Financial Management 3
17.1 Introduction (contd.)
• Even a purely domestic firm or a firm with imports
and exports but no cross-border manufacturing facilities can "internationalize" its cash management if the government of the country permits free capital inflows and outflows • In India as of now, the capital account has not been opened up
P.G.Apte International Financial Management 4
17.1 Introduction (contd.)
• Indian firms have been permitted access to foreign
money markets (through domestic banks) for pre- shipment credits for exports and settlement of import payments or through ECB, RDBs etc • The Exchange Earners Foreign Currency (EEFC) account facility
P.G.Apte International Financial Management 5
17.1 Introduction (contd.)
• The passive approach confines itself to minimizing
cash needs and currency exposure as well as optimal deployment of cash balances arising out of the firm's operating requirements • The active approach deliberately creates cash positions to profit from perceived market imperfections or the firm's supposedly superior forecasting ability
P.G.Apte International Financial Management 6
17.2 Short Term Borrowing and Investment • The principal dimensions of the borrowing- investment decisions are the instrument, currency, location of the financial center and any tax related issues • On a covered basis, the choice of currency of borrowing does not matter. • Only when the borrower firm holds views regarding currency movements which are different from market expectations as embodied in the forward rate, does the currency of borrowing become an important choice variable
P.G.Apte International Financial Management 7
17.2 Short Term Borrowing and Investment (contd.) • On a covered basis the firm should be indifferent between various currencies when it comes to placing temporary excess funds since the covered yields are identical • Considerations such as availability of various investment vehicles- deposits, CDs, CP, treasury bills etc.- and their liquidity may lead to one currency being favored over another
P.G.Apte International Financial Management 8
17.3 Where should Surplus Cash be Held? • Apart from cost and return considerations, several other factors influence the choice of currencies and locations for holding cash balances • The bid-ask spreads in exchange rate quotations represent transaction costs of converting currencies into one another
P.G.Apte International Financial Management 9
17.3 Where should Surplus Cash be Held? (contd.) • Minimizing transaction costs • Liquidity: Funds should be held in a currency in which they are most likely to be needed • Political risk • Availability of investment vehicles and their liquidity • Withholding taxes
P.G.Apte International Financial Management 10
17.3 Where should Surplus Cash be Held? (contd.) • Investing surplus funds • Choose appropriate investment vehicles so as to maximize the interest income while at the same time minimizing currency and credit risks and ensuring sufficient liquidity to meet any unforeseen cash requirements • The major investment vehicles available for short-term placement of funds are short term bank deposits, fixed term money market deposits such as CDs and financial and commercial paper P.G.Apte International Financial Management 11 17.3 Where should Surplus Cash be Held? (contd.) • Main considerations in choosing an investment vehicle • Yield • Marketability • Exchange Rate Risk • Price Risk • Transactions Costs
P.G.Apte International Financial Management 12
17.3 Where should Surplus Cash be Held? (contd.) • Financing Short-Term Deficits • Careful handling of short-term deficits can lead to significant savings • Minimize the overall borrowing requirement consistent with the firm's liquidity needs and to fund these at the minimum possible all-in cost
P.G.Apte International Financial Management 13
17.3 Where should Surplus Cash be Held? (contd.) • One of the cheapest ways of covering short-term deficits is internal funds • A centralized cash management system with cash pooling described below can efficiently allocate internal surpluses • External sources of short-term funding consist of overdraft facilities, fixed term bank loans and advances and instruments like commercial paper, trade and bankers' acceptances
P.G.Apte International Financial Management 14
17.4 Centralized Management Versus Decentralized Cash Management • Centralized cash management has several advantages • Netting • Exposure Management • Cash Pooling • Disadvantages of centralized management • Some funds have to be held locally in each subsidiary to meet unforeseen payments
P.G.Apte International Financial Management 15
17.4 Centralized Management Versus Decentralized Cash Management (contd.)
• Local problems in dealing with customers,
suppliers etc. • Conflicts of interest can arise if a subsidiary is not wholly owned but a joint venture with minority local stake
P.G.Apte International Financial Management 16
17.5 Cash Transmission
• Minimizing the unnecessary costs in the process of
collecting cash from debtors and making payments to creditors; the costs arising from the so called "float" • The treasurer must try and minimize the float in the cash collection cycle and take advantage of the float in the cash payment cycle
P.G.Apte International Financial Management 17
17.5 Cash Transmission (contd.)
• The banking systems in various countries have
evolved clearing mechanisms which aim at reducing the delays between a payment instruction being received and the payee actually being able to apply the funds
P.G.Apte International Financial Management 18
17.6 Summary
• Within the constraints imposed by the exchange
control and other regulations, a MNC has access to a much wider menu of funding avenues and investment vehicles for short-term funds management • Apart from funding and investment avenues, the mechanics of efficient cash transmission and configuration of bank accounts is an important aspect of cash management in a MNC • The decision to centralize cash management in a separate cash management center needs to be carefully evaluated
Foundational Theories and Techniques for Risk Management, A Guide for Professional Risk Managers in Financial Services - Part II - Financial Instruments