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. Organization
2. Collection/Fund Disbursement
3. Interaffiliate Payments
4. Investment of Excess Funds
5. Optimal Global Cash Balances
6. Cash Planning/Budgeting
*7. Bank Relations

4. INTERNATIONAL CASH MANAGEMENT
Issue (#1): Centralize Organization
1. Advantages:
a. Efficient liquidity levels
b. Enhanced profitability
c. Quicker headquarter response

5. INTERNATIONAL CASH MANAGEMENT
1. Advantages (con’t)
d. Decision making enhanced
e. Better volume currency quotes
f. Greater cash management
expertise
g. Less political risk

6. INTERNATIONAL CASH MANAGEMENT
Issue (#2): Collection/Disbursement of Funds
1. Key Element: Accelerate collections
2. Acceleration Methods:
a. Electronic fund transfers
b. Mobilization centers

7. INTERNATIONAL CASH MANAGEMENT
3. Methods to Expedite Cash Payments
a. Correspondent Banking: Establish accounts in client’s bank
b. Negotiate with banks
- obtain value dating

8. INTERNATIONAL CASH MANAGEMENT
Issue (#3): Interaffiliate Payments
Use Payments Netting
1. Definition:
offset payments of affiliate receivables/payables
net amounts only are transferred.

9. INTERNATIONAL CASH MANAGEMENT
2. Create Netting Center
a. set up a subsidiary in a location
with minimal exchange controls
b. Coordinate interaffiliate payment flows
c. Netting Center’s value:
a direct function of the volume of transfers.

10. INTERNATIONAL CASH MANAGEMENT
Issue (#4): Excess Funds Investment
1. Major task: a. determine minimum cash
balances
b. short-term investment of
excess balances

11. INTERNATIONAL CASH MANAGEMENT
2. Requirements:
a. Forecast of cash needs
b. Knowledge of minimum
cash position

12. INTERNATIONAL CASH MANAGEMENT
3. Investment Selection Criteria:
a. Degree of Government regulations
b. Market structure
c. Leniency of Foreign tax laws

13. INTERNATIONAL CASH MANAGEMENT
Issue (#5) Optimal Global Cash Balances
1. Establish centrally managed cash pool
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 for investment
c. Reduced internal expense
d. Reduced currency exposure

15. INTERNATIONAL CASH MANAGEMENT
Issue (#6) Cash Planning and Budgeting

16. INTERNATIONAL CASH MANAGEMENT
Issue (#7) Bank Relations
1. Good Relations Will Avoid
a. Lost interest income
b. 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 banks
b. High costs
such as compensating balances
c. Inadequate reporting
d. Excessive clearing delays

18. II. ACCOUNTS RECEIVABLE MANAGEMENT
A. Trade Credits
extended in anticipation of profit by
1. expanded sales volume
2. retaining existing customers

19. ACCOUNTS RECEIVABLE MANAGEMENT
B. Credit Terms Should Consider
1. Sales force
customer selection criteria
2. Adjusting sales bonuses for cost of uncollected credit sales.

20. III. INVENTORY MANAGEMENT
A. Problems:
MNCs seem to have more difficulties due to
1. Long,variable transits
2. Lengthy customs procedures

21. INVENTORY MANAGEMENT
B. Issue: Production Location Overseas location may incur larger inventories due to
a. larger amounts of work-in-
progress
b. more finished goods
2. Why?

22. Advanced Inventory Purchases inventory stockpiling.
INVENTORY MANAGEMENT
C. Subsidiary May Practice :
Advanced Inventory Purchases
aka
inventory stockpiling.

23. INVENTORY MANAGEMENT D. Reason for Stockpiling:
reduce risk of shipping delays
Results of Stockpiling:
Higher carrying costs
F. Solution to higher carrying costs:
Adjust subsidiary’s profit margins
to reflect added costs.

24. PART 2 Short-Term Financing
CHAPTER 19
PART 2
Short-Term Financing

25. SHORT-TERM FINANCING EIR IV. SHORT-TERM FINANCING A. Strategy
1. Identify: 3 key guidelines
2. Formulate/evaluate: objectives
3. Describe: available options
4. Develop a methodology:
to calculate/compare costs
EIR

26. SHORT-TERM FINANCING Key Guidelines:
1. Deviations from Int’l Fisher Effect?
a. If yes
trade-off required between
cost and exchange risk
b. If no
costs are same everywhere

27. SHORT-TERM FINANCING a. Yes. Currency is irrelevant.
2. Does Interest Rate Parity Hold?
a. Yes. Currency is irrelevant.
b. No. Cover costs may differ
-added risk may mean the
forward premium/discount
does not offset interest rate differentials.

28. SHORT-TERM FINANCING 3. Political Risk: If high, a. MNCs should
1.) maximize
local 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 regard
to cost.

30. SHORT-TERM FINANCING OBJECTIVES
D. Short-Term Financing Options
1. Three Possibilities
a. Inter-company loans
b. Local currency loans
c. 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.) Discounting
4.) Compensating balances

33. EFFECTIVE INTEREST RATE
3. Calculating Interest Costs
a. 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
= 11%

35. EFFECTIVE INTEREST RATE
Sample Problem #2 Discounting the loan
Pro 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,
= 1100
8900
= 12.4%

36. EFFECTIVE INTEREST RATE
Sample Problem #3: Compensating Balances
Pro 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,
= 1100
8500
= 12.9%

37. EFFECTIVE INTEREST RATE
Sample Problem #4: Compensating Balance on a discounted loan
Pro 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,
= 14.9%

38. COMMERCIAL PAPER 4. Non-bank lending : Commercial Paper a. Definition:
short-term unsecured promissory
note generally sold by large MNCs
on a discount basis.
b. Standard maturities
c. Bank fees charged for:
1.) Backup line of credit
2.) Credit rating service