Current Asset

Management and
Short-Term Financing
 PART 1

International Cash
Management
 INTERNATIONAL CASH
MANAGEMENT
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
 INTERNATIONAL CASH
MANAGEMENT

B. Goals of an International Cash

Manager: similar to domestic
manager
1. Quick and efficient cash control
2. Optimal conservation and usage
response
 INTERNATIONAL CASH
MANAGEMENT
Issue (#1): Centralize Organization
1. Advantages:
a. Efficient liquidity levels
b. Enhanced profitability
c. Quicker headquarter
 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
 INTERNATIONAL CASH
MANAGEMENT
Issue (#2): Collection/Disbursement of
Funds
1. Key Element: Accelerate collections
2. Acceleration Methods:
a. Electronic fund transfers
b. Mobilization centers
 INTERNATIONAL CASH
MANAGEMENT
3. Methods to Expedite Cash Payments
a. Wire cash transfers
b. Establish accounts in client’s bank
c. Negotiate with banks
- obtain value dating
 INTERNATIONAL CASH
MANAGEMENT

Issue (#3): Interaffiliate Payments

Use Payments Netting
1. Definition:
-offset payments of affiliate
receivables/payables
-net amounts only are transferred.
 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.
 INTERNATIONAL CASH
MANAGEMENT
Issue (#4): Excess Funds Investment
1. Major task:
a. determine minimum cash
balances
b. short-term investment of
excess balances
 INTERNATIONAL CASH
MANAGEMENT
2. Requirements:
a. Forecast of cash needs
b. Knowledge of minimum
cash position
 INTERNATIONAL CASH
MANAGEMENT
3. Investment Selection
Criteria:
a. Degree of Government
regulations
b. Market structure
c. Leniency of Foreign tax
laws
 INTERNATIONAL CASH
MANAGEMENT
Issue (#5) Optimal Global Cash
Balances
1. Establish centrally managed cash
pool
2. Require affiliates to hold minimum
amounts
 INTERNATIONAL CASH
MANAGEMENT

3. Benefits of Optimal Global Cash

Balances
a. Less outside borrowing needed
b. More excess fund for investment
c. Reduced internal expense
d. Reduced currency exposure
 INTERNATIONAL CASH
MANAGEMENT
Issue (#6) Cash Planning and
Budgeting
 INTERNATIONAL CASH
MANAGEMENT
Issue (#7) Bank Relations
1. Good Relations Will Avoid
a. Lost interest income
b. Overpriced services
c. Redundant services
 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
 ACCOUNTS RECEIVABLE
MANAGEMENT
II. ACCOUNTS RECEIVABLE
MANAGEMENT
A. Trade Credits
extended in anticipation of profit by
1. expanded sales volume
2. retaining existing customers
 ACCOUNTS RECEIVABLE
MANAGEMENT
B. Credit Terms Should Consider
1. Sales force
customer selection criteria
2. Adjusting sales bonuses for cost
of credit sales.
 INVENTORY MANAGEMENT

III. INVENTORY MANAGEMENT

A. Problems:
MNCs seem to have more
difficulties due to
1. Long,variable transits

2. Lengthy customs procedures

 INVENTORY MANAGEMENT

B. Issue: Production Location 1.

1. Overseas location may lead to
higher inventory carrying costs
due to
a. larger amounts of work-in-
process
b. more finished goods
2. Why?
 INVENTORY MANAGEMENT

C. Subsidiary Practice known as:

Advanced Inventory Purchases

or

inventory stockpiling
 INVENTORY MANAGEMENT

D. Reason for Stockpiling:

reduce risk of shipping delays

E. Results of Stockpiling:
Higher carrying costs
F. Solution to higher carrying costs:
Adjust affiliate’s profit margins to reflect
added costs.
 PART 2
Short-Term Financing
 SHORT-TERM FINANCING
IV. SHORT-TERM FINANCING
A. Strategy
1. Identify: 3 key factors
2. Formulate/evaluate:
objectives
3. Describe: available options
4. Develop a methodology:
to calculate/compare costs
EIR = The Effective Interest Rate
 SHORT-TERM FINANCING

B. Key Factors
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
 SHORT-TERM FINANCING

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.
 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
 SHORT-TERM FINANCING
OBJECTIVES
C. Short-Term Financing Objectives
1. Possible Objectives:
a. Minimize expected cost.
b. Minimize risk without regard
to cost.
 SHORT-TERM FINANCING
OBJECTIVES
D. Short-Term Financing Options
1. Three Possibilities
a. Inter-company loans
b. Local currency loans
c. Euro market
 SHORT-TERM FINANCING
OBJECTIVES
2. Local Currency Financing: Bank Loans
a. Short-term in nature
What is the role of cleanup clause?
b. Forms of Local Currency bank loans
1) Term loans
2) Line of credit
3) Discounting
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
 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 10,000
= 11%
 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 10,000-1100
= 1100
8900
= 12.4%
 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 10,000-1500
= 1100
8500
= 12.9%
 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 10,000-1100-1500
= 14.9%
 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