international cash management
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international cash management by sushil regmiTRANSCRIPT
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