1 Current Asset Management and Short-Term Financing Chapter 19

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


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

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

response

5


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

enhancede. Better volume currency

quotesf. Greater cash

managementexpertise

g. Less political risk

6


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

a. Electronic fund transfersb. Mobilization centers

7


3. Methods to Expedite Cash Payments

a. Correspondent Banking: Establish accounts in

client’s bankb. Negotiate with banks

- obtain value dating

8


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

Use Payments Netting1. Definition:

•offset payments of affiliate receivables/payables

•net amounts only are transferred.

9


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


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

1. Major task:a. determine minimum

cashbalances

b. short-term investment of

excess balances

11


2. Requirements:a. Forecast of cash

needsb. Knowledge of

minimumcash position

12


3. Investment Selection Criteria:

a. Degree of Government regulations

b. Market structurec. Leniency of Foreign

tax laws

13


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

1. Establish centrally managed cashpool

2. Require affiliates to hold minimum

amounts

14


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


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

16


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


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


C. Subsidiary May Practice :

Advanced Inventory Purchases

aka

inventory stockpiling.

23


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


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


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


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


D. Short-Term Financing Options1. Three Possibilities

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

31


2. Local Currency Financing: Bank Loans

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

interest rates

32


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


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


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


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


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

Documents

1 Current Asset Management and Short-Term Financing Chapter 19