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Multinational Financial Management Alan Shapiro7th Edition J.Wiley & SonsPower Points byJoseph F. Greco, Ph.D.California State University, Fullerton

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CHAPTER 19CURRENT 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 managementexpertiseg. 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 Centera. 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 cashbalancesb. short-term investment ofexcess balances2. Requirements:a. Forecast of cash needsb. Knowledge of minimumcash 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 cashpool2. Require affiliates to hold minimum

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INTERNATIONAL CASH MANAGEMENT

3. Benefits of Optimal Cash Balancesa. 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 Problemsa. Too many banksb. High costssuch as compensating balancesc. 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 MANAGEMENTB. 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 MANAGEMENTC. Advance Inventory Purchases

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

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INVENTORY MANAGEMENTd. Reason for Stockpiling:

greater risk of delaye. Solution to higher carrying

costs:Adjust affiliate’s profit

marginsto reflect added costs.

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IV. SHORT-TERM FINANCINGIV. SHORT-TERM FINANCING

A. Strategy1. Identify: key factors2. Formulate/evaluate:

objectives3. Describe: available options4. Develop a methodology:

to calculate/compare costs

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SHORT-TERM FINANCINGB. Key Factors

1. Deviations from Int’l Fisher Effect?a. If yestrade-off required betweencost and exchange riskb. If nocosts are same everywhere

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SHORT-TERM FINANCING2. Exchange Risk

a. Offset foreign assets withforeign liabilities

b. Borrow where no exposureincreases exchange risk

3. Firm’s Risk Aversiondirect relation to price incurred

to reduce exposure

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SHORT-TERM FINANCING4. 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 FINANCING5. 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 regardto cost.c. Trade off expected cost andsystematic risk.d. Trade off expect cost and total risk.

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SHORT-TERM FINANCINGD. Short-Term Financing Options

1. Three Possibilitiesa. Inter-company loansb. Local currency loansc. Euro market

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SHORT-TERM FINANCING2. Local Currency Financing: Bank Loansa. Short-term in naturerole of cleanup clauseb. Forms1.) Term loans2.) Line of credit3.) Overdrafts4.) Revolving Credit5.) Discounting

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SHORT-TERM FINANCING3. Calculating Interest Costsa. Effective interest rate (EIR): most efficient measure of costb. Basic formula:EIR = Annual Interest Paid Funds Received

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SHORT-TERM FINANCING4. Commercial Papera. 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