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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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.
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INTERNATIONAL CASH INTERNATIONAL CASH MANAGEMENTMANAGEMENT
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
INVENTORY MANAGEMENTINVENTORY MANAGEMENT
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.
INVENTORY MANAGEMENTINVENTORY MANAGEMENT
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.
IV.IV. SHORT-TERM FINANCINGSHORT-TERM FINANCING
IV.IV. SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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.
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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.
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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
SHORT-TERM FINANCINGSHORT-TERM FINANCING
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.