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Multinational Financial Management Alan Shapiro

7th Edition J.Wiley & SonsPower Points byJoseph F. Greco, Ph.D.California State University, Fullerton

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CHAPTER 19

CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING

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CHAPTER OVERVIEW

I. INTERNATIONAL CASH MANAGEMENT

II. ACCOUNTS RECEIVABLE MANAGEMENT

III. INVENTORY MANAGEMENTIV. SHORT-TERM FINANCING

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I. INTERNATIONAL CASH MANAGEMENT

I. INTERNATION CASH MANAGEMENTA. Seven Key Areas:

1. Organization2. Collection/Fund Disbursement3. Interaffiliate Payments Netting4. Excess-Funds Investment5. Optimal Global Cash Balances6. Cash Planning/Budgeting7. Bank Relations

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INTERNATIONAL CASH MANAGEMENT

B. Goals of an International Cash Manager1. Quick/efficient cash control2. Optimal conservation/usage

C. Organization: Centralize1. Advantages:a. Efficient liquidity levelsb. Enhanced profitabilityc. Quicker headquarter action

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INTERNATIONAL CASH MANAGEMENT

1. Advantages (con’)d. Decision making

enhancede. Better volume currency

quotesf. Greater cash management

expertiseg. Less political risk

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INTERNATIONAL CASH MANAGEMENT

D. Collection/Disbursement of Funds1. Key Element: Accelerate collections2. Acceleration Methods:

a. Cable remittancesb. Mobilization centersc. Lock boxesd. Electronic fund transfers

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INTERNATIONAL CASH MANAGEMENT

3. Methods to Expedite Cash Payments

a. Cable remittancesb. Establish accounts in client’s

bankc. Negotiate with banks

- obtain value dating

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INTERNATIONAL CASH MANAGEMENTE. Payments Netting

1. Definition:offset payments of affiliate

receivables/payables so that net amounts only are

transferred.2. Create Netting Center

a. a subsidiary set up in a locationwith minimal exchange controls

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INTERNATIONAL CASH MANAGEMENT

2. Netting Centers (con’t)b. Coordinate interaffiliate

payment flowsc. Center’s value is a direct

functionof transfer volume.

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INTERNATIONAL CASH MANAGEMENT

F.Excess Funds Investment1. Major task:

a. determine minimum cashbalances

b. short-term investment ofexcess balances

2. Requirements:a. Forecast of cash needsb. Knowledge of minimum

cash position

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INTERNATIONAL CASH MANAGEMENT

3. Investment Selection Criteria:a. Government regulationsb. Market structurec. Foreign tax laws

G. Optimal Global Cash Balances1. Establish centrally managed

cashpool

2. Require affiliates to hold minimum

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INTERNATIONAL CASH MANAGEMENT

3. Benefits of Optimal Cash Balances

a. Less borrowing neededb. More excess fund

investmentc. Reduced internal expensed. Reduced currency

exposure

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INTERNATIONAL CASH MANAGEMENT

H. Bank Relations1. Good Relations Will Avoid

a. Lost interest incomeb. Overpriced servicesc. Redundant services

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INTERNATIONAL CASH MANAGEMENT

2. Common Bank Relations Problems

a. Too many banksb. High costs

such as compensating balances

c. Inadequate reportingd. Excessive clearing

delays

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II. ACCOUNTS RECEIVABLE MANAGEMENT

II. ACCOUNTS RECEIVABLE MANAGEMENTA. Trade Credit

extended in anticipation of profit by

1. expanded sales volume2. retaining existing customers

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ACCOUNTS RECEIVABLE MANAGEMENTB. Credit Terms Should Consider

1. Sales force2. Adjusting bonuses for cost

of credit sales.

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III. INVENTORY MANAGEMENTA. Problems:

Seem to be more difficult due to

1. Long,variable transits2. Lengthy customs

procedures

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INVENTORY MANAGEMENT

B. Production Location/Inventory Control

1. Overseas locationmay lead to higher inventory carrying costs due toa. larger amounts of work-in-processb. more finished goods

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INVENTORY MANAGEMENT

C. Advance Inventory Purchases1. Usually where there are noforward hedges available2. Another hedging method:advance inventory purchases ofimported items, i.e. inventory stockpiling.

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INVENTORY MANAGEMENT

d. Reason for Stockpiling:greater risk of delay

e. Solution to higher carrying costs:

Adjust affiliate’s profit margins

to reflect added costs.

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IV. SHORT-TERM FINANCING

IV. SHORT-TERM FINANCINGA. Strategy

1. Identify: key factors2. Formulate/evaluate:

objectives3. Describe: available options4. Develop a methodology:

to calculate/compare costs

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SHORT-TERM FINANCING

B. Key Factors1. Deviations from Int’l Fisher Effect?

a. If yestrade-off required betweencost and exchange risk

b. If nocosts are same everywhere

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SHORT-TERM FINANCING

2. Exchange Riska. Offset foreign assets with

foreign liabilitiesb. Borrow where no exposure

increases exchange risk3. Firm’s Risk Aversion

direct relation to price incurred to reduce exposure

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SHORT-TERM FINANCING

4. Does Interest Rate Parity Hold?a. Yes. Currency is irrelevant.b. No. Cover costs may differ

-added risk may mean theforward premium/discountdoes not offset interest ratedifferentials.

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SHORT-TERM FINANCING

5. 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 FINANCINGC. Short-Term Financing Objectives

1. Four Possible Objectives:a. Minimize expected cost.b. Minimize risk without regard

to cost.c. Trade off expected cost and

systematic risk.d. Trade off expect cost and

total risk.

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SHORT-TERM FINANCING

D. Short-Term Financing Options1. Three Possibilities

a. Inter-company loansb. Local currency loansc. Euro market

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SHORT-TERM FINANCING2. Local Currency Financing: Bank

Loansa. Short-term in nature

role of cleanup clauseb. Forms

1.) Term loans2.) Line of credit3.) Overdrafts4.) Revolving Credit5.) Discounting

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SHORT-TERM FINANCING

3. Calculating Interest Costsa. Effective interest rate

(EIR): most efficient measure of cost

b. Basic formula:

EIR = Annual Interest

Paid Funds

Received

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SHORT-TERM FINANCING4. Commercial Paper

a. Definition:short-term unsecured promissorynote generally sold by large MNCs on a discount basis.

b. Standard maturitiesc. Bank fees charged for:

1.) Backup line of credit2.) Credit rating service