INTERNATIONAL CASH MANAGEMENT PART-I PRESENTED BY BHAWANA BHARDWAJ

INTERNATIONAL CASH MANAGEMENT

INTERNATIONAL CASH MANAGEMENT

Cash is the most liquid current asset. All other current assets such as receivables and inventory ultimately get converted into cash. Therefore, business should keep optimal cash balance at every point of time. It should neither be in excess nor short of its requirements. The term cash management includes:Determination of optimum amount of cash required in the business.Keep the cash balance at optimum level and investment of surplus in profitable manner.Prompt collection of cash from receivables(i.e. from debtors and bills receivables) and efficient disbursement of cash.Cash is one of the current assets of business. It is needed at all times to keep the business going. A business concern should always keep sufficient cash for meetings its obligations. Any shortage of cash will hamper the operations of a concern and any excess of it unproductive.

MEANING OF CASHFor the purpose of cash management, the term

cash not only includes coins,currency notes,cheques,bank drafts, demand deposits with

banks but also the ‘near-assets’ like marketable securities and time deposits with banks because they can be readily converted into cash. For the purpose of cash management, near-cash assets

are also included under cash because surplus cash required to be invested in near-cash assets

for the time being.

MOTIVES OF HOLDING CASH

Transaction motive:- A number of transactions take place in every business. Some of the transactions result in cash outflows such as payments for purchases, wages, operating expenses ,financial charges like interest, taxes , dividends etc. Similarly , some transaction result in cash inflows such as receipts from sales, receipts from sales, receipts from investments, other incomes etc. To meet the shortage of cash in situation when cash outflows exceed cash inflows, the business must have an adequate cash balance.

In every business, some cash balance is kept as a precautionary measure to meet any unexpected contingency. These contingency may include following:

Floods ,strikes and failures of important customers.

Unexpected slow down in collection from debtors.

Cancellation of orders by customers. Sharp increase in cost raw-materials. Increase in operating costs etc.

Precautionary motive

In business, some cash is kept in reserve to take advantage of profitable opportunities which may arise from time to time. These opportunities are:

Opportunity to purchase raw material at low prices on payment of immediate cash.

Opportunity to purchase securities when their prices are low.

Opportunity to purchase other assets for the business when their prices are low.

Speculative motive

Banks provide a number of services to the business such as clearance of cheques, supply of credit information about other customers, transfer of funds and soon . Bank charge commission or fee but they require indirect compensation. For this purpose, banks do not require indirect compensation. For this purpose, banks require the clients to maintain a minimum balance in their accounts in the bank.

Compensating motive

Factors determining cash needs and

level of cash.Timing of cash flows:-the need for maintaining cash balances arises because cash inflows and cash outflows take place at different place at different times. If cash inflows perfectly match cash outflows, i.e.if they take place at same time, there would be no need for keeping cash balancesCash shortage costs:-cash budgets would reveal the quantum as well as periods of cash shortages. Every shortages of cash involves a cost depending upon the quantum and duration of shortfall. Costs incurred as a result of shortfall of cash are called cash shortage costs. Cash excess costs:-if a firm keeps a cash balance in excess of its requirements, it will miss opportunities to invest it elsewhere. As a result it will lose interest which it would otherwise have earned by investing excess cash elsewhere. This factor should also be considered in determining the level of cash and therefore the level of cash should not be determined in excess.Cash management costs:-cash management also involves some costs such as salary, clerical expenses etc.of cash management staff. Cash need should be determined after considering this factor also.Uncertainty:- cash flows can never be predicted with complete accuracy and there is always some uncertainty in their forecast such as unexpected delay in collection from debtors. Firms must always keep some additional cash to meet these uncertainties'.

To maintain optimum cash balance:- The maintain objective of cash management is to determine the optimum cash balance required in the business to determine the optimum cash balances. Hence, an optimum level of cash should be determined by considering all the requirements of cash in the business.

To keep the optimum cash balance requirement at minimum level:- the second main objective of cash managemnt is to minimize cash balance requirement because cash is non-earning asset.This objective is achieved by managing the cash flows in such a manner that cash is collected promptly and liabilities are paid in time.

OBJECTIVES OF CASH MANAGEMENT.

Prevents insolvency of the business arising due to non-payment of its obligations on time.

Helps in availing the advantage of favourable business opportunities.

Business can meet its contingencies. Adequate cash balance helps in availing of the

cash discount by making the payment within due date.

Help in fostering good relations with the creditors by making prompt payment to them.

By maintaining adequate bank balance, the relationship with the bank is not strained.

Advantages of adequate cash

INTERNATIONAL CASH MANAGEMENT

INTERNATIONAL CASH MANAGEMENT PART-II

PRESENTED BY BHAWANA BHARDWAJ

Steps involved in international cash management

The management of cash basically involves four steps as follows:-Assessment of the cash requirements:-the first step in international management is to establish the need for cash during a specific period, which may a week, a fortnight, or a month. It is computed on the basis of expected amount of cash disbursement vis-à-vis expected inflow of cash during a particular period. The outflow and inflow of cash occurs mainly on account of various transactions. The firm holds cash also to meet precautionary and determined on the basis of experience and the general trend of the business environment.Steps involved in assessment of cash needs:-A cash budget is prepared for each subsidiary.After assessing the cash needs of each of the subsidiaries. The figures are consolidated in order to assess the cash need of the firm as a whole. It is because in a multinational enterprise. It is a cash flow of the firm as a whole that is taken into account and which needs to be managed.

OPTIMIZATION OF CASH NEEDS:-after the preparation of cash budget and the estimation the cash a requirement, the firm needs optimization of cash level at different units. It can be done in three ways:

INTRA-FIRM TRANSFER OF CASH:- WHEN A PARTICULAR UNIT FACES A SHORTAGE OF CASH,IT GETS IT FROM CASH SURPLUS UNIT, MAY IT BE PARENT UNIT OR ANY OTHER SISTER SUBSIDIARY. IT MAY RAISE FUNDS FORM OUTSIDE THE FIRM IF OUTSIDE THE FIRM IF OUTSIDE FUNDS ARE CHEAPER AND EASIER THAN THE INTRA-FIRM FLOW OF CASH IN VIEW GOVERNMENTAL RESTRICTION ON SUCH FLOWS. HOWEVER, THE UNIT OFTEN PREFERS INTRA-FIRM TRANSFER OF CASH IN VIEW OF THE FACT THAT THE SURPLUSES OF THE OTHER UNITS ARE UTILIZED. THIS IS PERHAPS WHY FUNDS ARE TRANSFERRED FROM ONE UNIT TO THE OTHER. THE MODES ARE:

TRANSFER PRICING: ARBITRARILY DETERMINED PRICE NORMALLY FOR INTRA-FIRM TRANSFER OF GOODS AND SERVICES WHICH IS QUITE DIFFERENT FROM ARM’S-LENGTH PRICE(THE PRICE AT WHICH A SELLER TRANSACTS WITH AN UNRELATED BUYER. NORMALLY, IT IS BASED ON COST/ MARKET PRICE.) AND WHICH IS DONE FOR THE PURPOSE OF REDUCING OVERALL TAX AND TARIFF BURDEN AS ALSO FOR THE WORKING CAPITAL MANAGEMENT.LEADS AND LAGSLEADING:- SHORTENING CREDIT TERM IN NUMBER OF DAYS.LAGGING:-EXTENDING OR ENLARGING OF THE DAYS OF CREDIT.PARALLEL LOANS:-SIMULTANEOUS BORROWING AND LENDING INVOLVING FOUR-RELATED PARTIES IN TWO COUNTRIESCHANGES IN THE RATE OF ROYALTY.DIVIDEND AND SOON.ACCELERATING INFLOWS AND DELAYING OUTFLOWSACCELERATING INFLOWS AND DELAYING OUTFLOWSACCELERATING INFLOWS AND DELAYING INFLOWS: THERE ARE TWO TYPES OF DELAYS IN COLLECTION OF CASH. ONE IS THE MAILING DELAY AND OTHER IS THE PROCESSING DELAY. IN COLLECTION FROM ACROSS THE BORDER, LONG PROCEDURAL FORMALITIES AND GOVERNMENTAL RESTRICTIONS TOO COME IN THE WAY.FOR ACCELERATING INFLOWS FOLLOWING METHODS ARE USED:

CABLE REMMITTANCES ESTABLISHMENT OF COLLECTION CENTRES LOCK-BOX SYSTEM REDUCTION OF PROCESSING DELAY PRE- AUTHORIZED PAYMENT SYSTEMDELAYING OUTFLOWS AVOIDANCE OF EARLY PAYMENTS CENTRALIZED DISBURSEMENT

DELAYING OUTFLOWS: PAYMENT SHOULD BE MADE AS LATE AS POSSIBLE WITHOUT

DAMAGING THE GOOD WILL AND CREDIT RATING OF THE FIRM. THERE ARE CERTAIN

TECHNIQUE TO SLOW THE DISBURSEMENT:AVOIDANCE OF EARLY PAYMENTS

CENTRALIZED DISBURSEMENTS

NETTING OF INTRA-FIRM PAYMENTS:- ANOTHER STEP TOWARDS LESSENING THE REQUIREMENTS FOR CASH AT A PARTICULAR POINT OF TIME IS TO ENCOURAGES NETTING OF INTRA-FIRM PAYMENTS.THERE IS USUALLY A LARGE VOLUME OF INTRA-FIRM PAYMENTS. SUCH PAYMENTS REQUIRED NOT ONLY A HUGE AMOUNT OF CASH, BUT ALSO TRANSACTION COST, INTER CURRENCY CONVERSION COST AND OPPORTUNITY COST OF FLOAT.

The different units of a firm require cash not only for making payments but also for meeting such costs. Netting is a solution of this problem. Netting is in fact the elimination of counter payments. This means that only net amount is paid.

NO NETTING

A

CB

BILATERAL NETTING

A

CB

MULTILATERAL NETTING

A

CB

The cash balance for precautionary and speculative purposes is fixed and so it is held in the form of near-cash assets or near-cash assets or short term marketable securities. The reason is that near-cash assets earn for the firm and are definitely preferable to an idle cash balance. In this context, a few questions need to be probed. They are:

Should the surplus cash balance of the entire firm centralised and only then invested?

INVESTMENT OF SURPLUS CASH

How much of the surplus cash balance should be invested in near-cash assets?

Which currency should be preferred for investment? Centralization:- the process of centralization of surplus

cash can take two forms. One is the centralized control of the parent company over the surplus cash of different units. In this case, cash does not actually move to a centralized pool, but its movement to a cash-deficit unit or for investment in near-cash assets is strictly guided by the parent company. The other form manifests in the actual movement of cash to a centralized pool.

Surplus cash should not lie idle. It should be invested. The larger the investment, the greater the interests earned, but at the same time the great risk is illiquidity. Lower the investment, liquid will improve but earning on the investment will be lower.Thus,an optimal division of funds between cash andnear-assets requires between liquidity and profitability.while making an investment in near-assets, the international finance manager.Has to take care of number of facts, or which the following are important:

How much of the surplus to be invested

Portfolio should be diversified so as to maximize yield for a given level of risk.

The portfolio should be reviewed daily so as to decide which particular investment has to be liquidated or which particular securities should be remain undistributed.

Investment should only be made in assets where liquidity prevails.

The maturity structure should coincide with the need for cash so that securities can be easily converted back into cash whenever the need for fresh cash arises.

Normally , the surplus cash invested in a country where the interest rate is high. However,the answer is not so simple. In fact, the firm has to take into accounts the effective yield/return that depends not simply on the rate of interest but also on the changes in the exchange rate. If the currency of the country where the funds are invested depreciated vis-a- vis the home- country currency, the return in terms of home country currency will be lower. More often, a firm makes multiple-currency will be lower. More often, a firm makes multiple-currency will investments and reaps the benefit of diversification.

Currency of investment