1 Current Asset Management and Short-Term Financing Chapter 19.
Post on 16-Jan-2016
215 Views
Preview:
Transcript
1
Current Asset Management and Short-
Term Financing
Chapter 19
2
INTERNATIONAL CASH MANAGEMENT
Goals of an International Cash Manager: similar to domestic manager
1. Quick and efficient cash control
2. Optimal conservation and usage
response
3
I. INTERNATIONAL CASH MANAGEMENT
A. Seven Key Areas Involve Issues about
1. Organization2. Collection/Fund Disbursement3. Interaffiliate Payments 4. Investment of Excess Funds5. Optimal Global Cash Balances6. Cash Planning/Budgeting
*7. Bank Relations
4
INTERNATIONAL CASH MANAGEMENT
Issue (#1): Centralize Issue (#1): Centralize OrganizationOrganization
1. Advantages:a. Efficient liquidity levelsb. Enhanced profitabilityc. Quicker headquarter
response
5
INTERNATIONAL CASH MANAGEMENT
1. Advantages (con’t)d. Decision making
enhancede. Better volume currency
quotesf. Greater cash
managementexpertise
g. Less political risk
6
INTERNATIONAL CASH MANAGEMENT
Issue (#2):Issue (#2): Collection/Disbursement Collection/Disbursement of of FundsFunds1. Key Element: Accelerate collections2. Acceleration Methods:
a. Electronic fund transfersb. Mobilization centers
7
INTERNATIONAL CASH MANAGEMENT
3. Methods to Expedite Cash Payments
a. Correspondent Banking: Establish accounts in
client’s bankb. Negotiate with banks
- obtain value dating
8
INTERNATIONAL CASH MANAGEMENT
Issue (#3): Interaffiliate Issue (#3): Interaffiliate Payments Payments
Use Payments Netting1. Definition:
•offset payments of affiliate receivables/payables
•net amounts only are transferred.
9
INTERNATIONAL CASH MANAGEMENT
2. Create Netting Centera. set up a subsidiary in a locationwith minimal exchange controlsb. Coordinate interaffiliate payment flowsc. Netting Center’s value: a direct function of the volume of transfers.
10
INTERNATIONAL CASH MANAGEMENT
Issue (#4): Excess Funds Issue (#4): Excess Funds InvestmentInvestment
1. Major task:a. determine minimum
cashbalances
b. short-term investment of
excess balances
11
INTERNATIONAL CASH MANAGEMENT
2. Requirements:a. Forecast of cash
needsb. Knowledge of
minimumcash position
12
INTERNATIONAL CASH MANAGEMENT
3. Investment Selection Criteria:
a. Degree of Government regulations
b. Market structurec. Leniency of Foreign
tax laws
13
INTERNATIONAL CASH MANAGEMENT
Issue (#5) Optimal Global Issue (#5) Optimal Global Cash BalancesCash Balances
1. Establish centrally managed cashpool
2. Require affiliates to hold minimum
amounts
14
INTERNATIONAL CASH MANAGEMENT
3. Benefits of Optimal Centralized Global Cash Balances
a. Less outside borrowing needed
b. More excess fund forinvestment
c. Reduced internal expensed. Reduced currency
exposure
15
INTERNATIONAL CASH MANAGEMENT
Issue (#6)Issue (#6) Cash Planning Cash Planning and Budgetingand Budgeting
16
INTERNATIONAL CASH MANAGEMENT
Issue (#7) Bank Relations Issue (#7) Bank Relations
1. Good Relations Will Avoida. Lost interest incomeb. Overpriced services
e.g. check fees, monthly svc chgs, notary services.
c. Redundant services
17
INTERNATIONAL CASH MANAGEMENT
2. Common Bank Relations Problems
a. Too many banksb. High costs
such as compensating balances
c. Inadequate reportingd. Excessive clearing
delays
18
II. ACCOUNTS RECEIVABLE MANAGEMENT
A. Trade Creditsextended in anticipation of
profit by1. expanded sales volume2. retaining existing
customers
19
ACCOUNTS RECEIVABLE MANAGEMENT
B. Credit Terms Should Consider1. Sales force
customer selection criteria2. Adjusting sales bonuses
for cost of uncollected credit sales.
20
III. INVENTORY MANAGEMENT
A. Problems:MNCs seem to have more
difficulties due to1. Long,variable transits
2. Lengthy customs procedures
21
INVENTORY MANAGEMENT
B. Issue: Production Location 1. Overseas location may
incur larger inventories due to
a. larger amounts of work-in-
progressb. more finished goods
2. Why?
22
INVENTORY MANAGEMENT
C. Subsidiary May Practice :
Advanced Inventory Purchases
aka
inventory stockpiling.
23
INVENTORY MANAGEMENT
D. Reason for Stockpiling:reduce risk of shipping delays
E. Results of Stockpiling:Higher carrying costs
F. Solution to higher carrying costs:Adjust subsidiary’s profit
marginsto reflect added costs.
24
CHAPTER 19
PART 2
Short-Term Financing
25
SHORT-TERM FINANCING
IV. SHORT-TERM FINANCINGA. Strategy
1. Identify: 3 key guidelines2. Formulate/evaluate:
objectives3. Describe: available
options4. Develop a methodology:
to calculate/compare costs
EIR
26
SHORT-TERM FINANCING
B. Key Guidelines:1. Deviations from Int’l Fisher
Effect?a. If yes
trade-off required between
cost and exchange riskb. If no
costs are same everywhere
27
SHORT-TERM FINANCING
2. 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 rate differentials.
28
SHORT-TERM FINANCING
3. Political Risk: If high, a. MNCs should 1.) maximizelocal financing.2.) Faced with confiscation or currency controls,fewer assets at risk
29
SHORT-TERM FINANCING OBJECTIVES
C. Short-Term Financing Objectives
1. Possible Objectives:a. Minimize expected cost.b. Minimize risk without
regardto cost.
30
SHORT-TERM FINANCING OBJECTIVES
D. Short-Term Financing Options1. Three Possibilities
a. Inter-company loansb. Local currency loansc. Eurocurrency market
31
SHORT-TERM FINANCING OBJECTIVES
2. Local Currency Financing: Bank Loans
a. Short-term in nature: - Definition of term- The term structure of
interest rates
32
SHORT-TERM FINANCING OBJECTIVES
b.Forms of Local Currency bank credits
1.) Term loan: bank loan to a company, with a fixed
maturity and often featuring amortization of
principal 2.) Line of credit:
W hat is the cleanup clause? Its purpose?
3.) Discounting4.) Compensating balances
33
EFFECTIVE INTEREST RATE
3. Calculating Interest Costsa. Effective interest rate
(EIR): - most efficient measure
of cost
b. Basic formula:
EIR = Annual Interest
Paid Funds Received
34
EFFECTIVE INTEREST RATE
Sample Problem #1 Pro Logic Co. receives a loan for
$10,000 at 11% interest payable at maturity at the end of one year. What is the EIR?
EIR = $1,100 (10,000x.11)$10,000 10,000
= 11%
35
EFFECTIVE INTEREST RATE
Sample Problem #2 Discounting the loanPro Logic Co. receives a loan for $10,000 at 11% on a discounted basis for one year. What is the EIR?
EIR = $1,100 (10,000x.11)$8,900 10,000-1100
= 11008900
= 12.4%
36
EFFECTIVE INTEREST RATE
Sample Problem #3: Compensating BalancesPro Logic Co. receives a loan for $10,000 at 11% with a 15% compensating balance requirement for one year. What is the EIR?
EIR = $1,100 (10,000x.11)$8,500 10,000-1500
= 11008500
= 12.9%
37
EFFECTIVE INTEREST RATE
Sample Problem #4: Compensating Balance on a discounted loanPro Logic Co. receives a loan for $10,000 at 11% on a discounted basis and a 15% compensating balance requirement for one year. What is the EIR?
EIR = $1,100 (10,000x.11)$7,400 10,000-1100-
1500= 14.9%
38
COMMERCIAL PAPER
4. Non-bank lending : Commercial Papera. Definition:
short-term unsecured promissorynote generally sold by large
MNCson a discount basis.
b. Standard maturitiesc. Bank fees charged for:
1.) Backup line of credit2.) Credit rating service
top related