1 Current Asset Management and Short-Term Financing Chapter 19.

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Current Asset Management and Short-

Term Financing

Chapter 19

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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

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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

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Issue (#1): Centralize Issue (#1): Centralize OrganizationOrganization

1. Advantages:a. Efficient liquidity levelsb. Enhanced profitabilityc. Quicker headquarter

response

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1. Advantages (con’t)d. Decision making

enhancede. Better volume currency

quotesf. Greater cash

managementexpertise

g. Less political risk

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Issue (#2):Issue (#2): Collection/Disbursement Collection/Disbursement of of FundsFunds1. Key Element: Accelerate collections2. Acceleration Methods:

a. Electronic fund transfersb. Mobilization centers

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3. Methods to Expedite Cash Payments

a. Correspondent Banking: Establish accounts in

client’s bankb. Negotiate with banks

- obtain value dating

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Issue (#3): Interaffiliate Issue (#3): Interaffiliate Payments Payments

Use Payments Netting1. Definition:

•offset payments of affiliate receivables/payables

•net amounts only are transferred.

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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.

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Issue (#4): Excess Funds Issue (#4): Excess Funds InvestmentInvestment

1. Major task:a. determine minimum

cashbalances

b. short-term investment of

excess balances

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2. Requirements:a. Forecast of cash

needsb. Knowledge of

minimumcash position

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3. Investment Selection Criteria:

a. Degree of Government regulations

b. Market structurec. Leniency of Foreign

tax laws

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Issue (#5) Optimal Global Issue (#5) Optimal Global Cash BalancesCash Balances

1. Establish centrally managed cashpool

2. Require affiliates to hold minimum

amounts

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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

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Issue (#6)Issue (#6) Cash Planning Cash Planning and Budgetingand Budgeting

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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

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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

A. Trade Creditsextended in anticipation of

profit by1. expanded sales volume2. retaining existing

customers

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ACCOUNTS RECEIVABLE MANAGEMENT

B. Credit Terms Should Consider1. Sales force

customer selection criteria2. Adjusting sales bonuses

for cost of uncollected credit sales.

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III. INVENTORY MANAGEMENT

A. Problems:MNCs seem to have more

difficulties due to1. Long,variable transits

2. Lengthy customs procedures

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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?

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C. Subsidiary May Practice :

Advanced Inventory Purchases

aka

inventory stockpiling.

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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.

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CHAPTER 19

PART 2

Short-Term Financing

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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

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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

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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.

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3. Political Risk: If high, a. MNCs should 1.) maximizelocal financing.2.) Faced with confiscation or currency controls,fewer assets at risk

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SHORT-TERM FINANCING OBJECTIVES

C. Short-Term Financing Objectives

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

regardto cost.

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D. Short-Term Financing Options1. Three Possibilities

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

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2. Local Currency Financing: Bank Loans

a. Short-term in nature: - Definition of term- The term structure of

interest rates

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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

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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

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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%

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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%

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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%

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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%

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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

1 Current Asset Management and Short-Term Financing Chapter 19.

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