CHAPTER 13 CURRENT ASSET MANAGEMENT. CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING CHAPTER OVERVIEW: I.INTERNATIONAL CASH MANAGEMENT II.ACCOUNTS RECEIVABLE.

CHAPTER 13CHAPTER 13

CURRENT ASSET CURRENT ASSET MANAGEMENT MANAGEMENT

CURRENT ASSET MANAGEMENTCURRENT ASSET MANAGEMENTAND SHORT-TERM FINANCINGAND SHORT-TERM FINANCING

CHAPTER OVERVIEW:CHAPTER OVERVIEW:

I.I. INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT

II.II. ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE MANAGEMENTMANAGEMENT

III.III. INVENTORY MANAGEMENTINVENTORY MANAGEMENT

IV.IV. SHORT-TERM FINANCINGSHORT-TERM FINANCING

I.I. INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT

I.I. INTERNATION CASH MANAGEMENTINTERNATION CASH MANAGEMENT

A.A. Seven Key Areas:Seven Key Areas:1.1. OrganizationOrganization2.2. Collection/Fund DisbursementCollection/Fund Disbursement3.3. Interaffiliate Payments NettingInteraffiliate Payments Netting4.4. Excess-Funds InvestmentExcess-Funds Investment5.5. Optimal Global Cash BalancesOptimal Global Cash Balances6.6. Cash Planning/BudgetingCash Planning/Budgeting7.7. Bank RelationsBank Relations

INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT

B.B. Goals of an International Cash ManagerGoals of an International Cash Manager

1.1. Quick/efficient cash controlQuick/efficient cash control

2.2. Optimal conservation/usage Optimal conservation/usage

C.C. Organization:Organization: CentralizeCentralize

1.1. Advantages:Advantages:

a.a. Efficient liquidity levelsEfficient liquidity levels

b.b. Enhanced profitabilityEnhanced profitability

c.c. Quicker headquarter actionQuicker headquarter action


1.1. Advantages (con’t)Advantages (con’t)

d.d. Decision making enhancedDecision making enhanced

e.e. Better volume currency Better volume currency quotesquotes

f.f. Greater cash managementGreater cash management

expertiseexpertise

g.g. Less political risk Less political risk


D.D. Collection/Disbursement of FundsCollection/Disbursement of Funds

1.1. Key Element:Key Element: Accelerate collectionsAccelerate collections

2.2. Acceleration Methods:Acceleration Methods:

a.a. Cable remittancesCable remittances

b.b. Mobilization centersMobilization centers

c.c. Lock boxesLock boxes

d.d. Electronic fund transfersElectronic fund transfers


3.3. Methods to Expedite Cash Methods to Expedite Cash PaymentsPayments

a.a. Cable remittancesCable remittances

b.b. Establish accounts in client’s Establish accounts in client’s bankbank

c.c. Negotiate with banksNegotiate with banks

- obtain value dating- obtain value dating


E.E. Payments NettingPayments Netting

1.1. Definition:Definition:

offset payments of affiliate offset payments of affiliate receivables/payables so that net receivables/payables so that net amounts amounts only are transferred.only are transferred.

2.2. Create Netting CenterCreate Netting Center

a.a. a subsidiary set up in a locationa subsidiary set up in a location

with minimal exchange controlswith minimal exchange controls


2.2. Netting Centers (con’t)Netting Centers (con’t)

b.b. Coordinate interaffiliate Coordinate interaffiliate payment payment flowsflows

c.c. Center’s value is a direct Center’s value is a direct functionfunction

of transfer volume.of transfer volume.


F.F. Excess Funds InvestmentExcess Funds Investment1.1. Major task:Major task:

a.a. determine minimum cashdetermine minimum cashbalancesbalances

b.b. short-term investment ofshort-term investment ofexcess balancesexcess balances

2.2. Requirements:Requirements:a.a. Forecast of cash needsForecast of cash needsb.b. Knowledge of minimumKnowledge of minimum

cash position cash position


3.3. Investment Selection Criteria:Investment Selection Criteria:

a.a. Government regulationsGovernment regulations

b.b. Market structureMarket structure

c.c. Foreign tax lawsForeign tax laws

G.G. Optimal Global Cash BalancesOptimal Global Cash Balances

1.1. Establish centrally managed cashEstablish centrally managed cash

poolpool

2.2. Require affiliates to hold Require affiliates to hold minimumminimum


3.3. Benefits of Optimal Cash Benefits of Optimal Cash BalancesBalances

a.a. Less borrowing ncededLess borrowing nceded

b.b. More excess fund More excess fund investmentinvestment

c.c. Reduced internal expenseReduced internal expense

d.d. Reduced currency exposureReduced currency exposure


I.I. Bank RelationsBank Relations

A.A. Good Relations Will AvoidGood Relations Will Avoid

1.1. Lost interest incomeLost interest income

2.2. Overpriced servicesOverpriced services

3.3. Redundant servicesRedundant services


2.2. Common Bank Relations Common Bank Relations ProblemsProblems

a.a. Too many banksToo many banks

b.b. High costsHigh costs

such as compensating such as compensating balancesbalances

c.c. Inadequate reportingInadequate reporting

d.d. Excessive clearing delaysExcessive clearing delays

II.II. ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE MANAGEMENTMANAGEMENT

II.II.ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE MANAGEMENTMANAGEMENT

A.A. Trade CreditTrade Credit

extended in anticipation of profit byextended in anticipation of profit by

1.1. expanded sales volumeexpanded sales volume

2.2. retaining existing customersretaining existing customers

ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE MANAGEMENTMANAGEMENT

B.B. Credit Terms Should ConsiderCredit Terms Should Consider

1.1. Sales forceSales force

2.2. Adjusting bonuses for cost of Adjusting bonuses for cost of

credit sales.credit sales.

III.III. INVENTORY INVENTORY MANAGEMENTMANAGEMENT

A.A. Problems:Problems:Seem to be more difficult due Seem to be more difficult due

toto1.1. Long,variable transitsLong,variable transits2.2. Lengthy customs Lengthy customs

proceduresprocedures

INVENTORY MANAGEMENTINVENTORY MANAGEMENT

B.B. Production Location/Inventory Production Location/Inventory ControlControl

1.1. Overseas locationOverseas location

may lead to higher inventory may lead to higher inventory

carrying costs due tocarrying costs due to

a.a. larger amounts of work-in-larger amounts of work-in-

processprocess

b.b. more finished goodsmore finished goods


C.C. Advance Inventory PurchasesAdvance Inventory Purchases

1.1. Usually where there are noUsually where there are no

forward hedges availableforward hedges available

2.2. Another hedging method:Another hedging method:

advance inventory purchases advance inventory purchases ofof

imported items, imported items,

i.e. inventory stockpiling.i.e. inventory stockpiling.


d.d. Reason for Stockpiling:Reason for Stockpiling:

greater risk of delaygreater risk of delay

e.e. Solution to higher carrying Solution to higher carrying costs:costs:

Adjust affiliate’s profit marginsAdjust affiliate’s profit margins

to reflect added costs.to reflect added costs.



A.A. StrategyStrategy

1.1. Identify:Identify: key factorskey factors

2.2. Formulate/evaluate:Formulate/evaluate:objectivesobjectives

3.3. Describe:Describe: available optionsavailable options

4.4. Develop a methodology:Develop a methodology:

to calculate/compare coststo calculate/compare costs

SHORT-TERM FINANCINGSHORT-TERM FINANCING

B.B. Key FactorsKey Factors

1. Deviations from Int’l Fisher Effect?1. Deviations from Int’l Fisher Effect?

a. If yesa. If yes

trade-off required betweentrade-off required between

cost and exchange riskcost and exchange risk

b. If nob. If no

costs are same everywherecosts are same everywhere


2.2. Exchange RiskExchange Risk

a.a. Offset foreign assets withOffset foreign assets with

foreign liabilitiesforeign liabilities

b.b. Borrow where no exposureBorrow where no exposure

increases exchange riskincreases exchange risk

3.3. Firm’s Risk AversionFirm’s Risk Aversion

direct relation to price incurred direct relation to price incurred to to reduce exposurereduce exposure


4.4. Does Interest Rate Parity Hold?Does Interest Rate Parity Hold?

a.a. Yes. Currency is irrelevant.Yes. Currency is irrelevant.

b.b. No.No. Cover costs may differCover costs may differ

-added risk may mean the-added risk may mean the

forward premium/discountforward premium/discount

does not offset interest ratedoes not offset interest rate

differentials.differentials.


5.5. Political Risk: If high, Political Risk: If high,

a.a. MNCs should MNCs should

1.)1.) maximizemaximize

local financing.local financing.

2.)2.) Faced with Faced with confiscation confiscation or currency or currency controls,controls,

fewer assets at riskfewer assets at risk


C.C. Short-Term Financing ObjectivesShort-Term Financing Objectives1.1. Four Possible Objectives:Four Possible Objectives:

a.a. Minimize expected cost.Minimize expected cost.b.b. Minimize risk without regardMinimize risk without regard

to cost.to cost.c.c. Trade off expected cost andTrade off expected cost and

systematic risk.systematic risk.d.d. Trade off expect cost and Trade off expect cost and

total risk.total risk.


D.D. Short-Term Financing OptionsShort-Term Financing Options

1.1. Three PossibilitiesThree Possibilities

a.a. Intercompany loansIntercompany loans

b.b. Local currency loansLocal currency loans

c.c. Euro marketEuro market


2.2. Local Currency Financing: Bank Local Currency Financing: Bank LoansLoans

a.a. Short-term in natureShort-term in nature

role of cleanup clauserole of cleanup clauseb.b. FormsForms

1.)1.) Term loansTerm loans2.)2.) Line of creditLine of credit3.)3.) OverdraftsOverdrafts4.)4.) Revolving CreditRevolving Credit5.)5.) DiscountingDiscounting


3.3. Calculating Interest CostsCalculating Interest Costs

a.a. Effective interest rate Effective interest rate (EIR): (EIR): most efficient most efficient measure measure of costof cost

b.b. Basic formula:Basic formula:

EIR = EIR = Annual Interest Annual Interest

PaidPaidFunds ReceivedFunds Received


4.4. Commercial PaperCommercial Papera.a. Definition:Definition:

short-term unsecured promissoryshort-term unsecured promissorynote generally sold by large note generally sold by large MNCs on a discount basis.MNCs on a discount basis.

b.b. Standard maturitiesStandard maturitiesc.c. Bank fees charged for:Bank fees charged for:

1.)1.) Backup line of creditBackup line of credit2.)2.) Credit rating serviceCredit rating service


5.5. Euronotes and Euro-Commercial Euronotes and Euro-Commercial PaperPaper

a.a. EuronotesEuronotes

unsecured short-term debt unsecured short-term debt securities denominated in US$ securities denominated in US$ andand

issued by corporations and issued by corporations and governments.governments.

b.b. Euro-commercial paper(CP)Euro-commercial paper(CP)

euronotes not bank underwritteneuronotes not bank underwritten


c.c. U.S. vs. Euro-CPsU.S. vs. Euro-CPs

1.)1.) Average maturity longer (2x)Average maturity longer (2x)

for Euro-CPsfor Euro-CPs

2.)2.) Secondary market for Euro;Secondary market for Euro;

not U.S. CPs.not U.S. CPs.

3.)3.) Smaller fraction of Euro useSmaller fraction of Euro use

credit rating services to rate.credit rating services to rate.

CHAPTER 13 CURRENT ASSET MANAGEMENT. CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING CHAPTER OVERVIEW: I.INTERNATIONAL CASH MANAGEMENT II.ACCOUNTS RECEIVABLE.

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