CASH MANAGEMENT

MEANING:
 Cash is the most liquid form of asset. It
includes demand deposits and currency.
Cash is also known as an idle or non-
earning asset.
 So, the goal of cash management is to
minimize the amount of cash in the
business. But this minimum balance of
cash should be enough to conduct
normal business activities and also
meet the unexpected cash needs of the
MNC.
04/19/2022 VIJAY 2
 An MNC generally holds cash to take care of its
transaction needs, contingency needs and
opportunity needs.

 Itrequires cash to carry out its day-to-day

business transactions. As the volume of
business increases, the need for cash also
increases.

 A firm may be able to meet unexpected events

or accidents if it has a sufficient cash balance.
Further, an MNC needs cash to profit from
certain opportunities that may arise any time.
04/19/2022 VIJAY 3
 Ex:- 1. An MNC may find an opportunity to
buy a large quantity of raw material before
the arrival of inflation in a country.

 2.It may realize substantial savings on its

cash purchases or avail special offers on
certain instant cash payments.

 3.It may also get a chance to acquire

another firm on very favorable terms if it has
adequate holdings of cash and cash-
equivalent assets.
04/19/2022 VIJAY 4
 Cash management involves cash
planning and management of cash flows
in the business.

 By cash planning, an MNC can anticipate

its future cash flows as well as its cash
needs. It may also enable the
management of a firm to reduce the
possibility of idle cash and cash deficits.
.

04/19/2022 VIJAY 5
 Cash planning involves the preparation of
cash budget based on cash forecasts. A cash
budget is a statement that is prepared on the
basis of the budgeted activities of the firm.

 It shows the expected cash inflows and

outflows of a firm over a certain period, say
3/6 months or one year.

 Daily or weekly cash budgets with many

details are also prepared by MNCs for actual
cash control.

04/19/2022 VIJAY 6
 Cash budget also show the cumulative
cash deficit or surplus during the
budgeted period. This helps the firm in
making cash management decisions such
as determining the amount of marketable
securities to be purchased/sold and the
amount of short-term loan to be made by
the firm.

 Thus,the cash budget indicates the

expected cash deficit or cash surplus
ahead of time.
04/19/2022 VIJAY 7
 With advance knowledge of cash deficits,
a firm can plan for alternative sources of
financing. Similarly with advance
knowledge of surplus cash, the firm can
plan for appropriate short-term
investments.
 Management always aim at reducing the
difference between projected cash flows
and actual cash flows, and the
management of an MNC too seeks to
maintain proper control its cash collection
and disbursement.
04/19/2022 VIJAY 8
 As the collection and disbursement of
cash are two sides of the same coin, they
will have a joint effect on the overall
efficiency of cash management.

 The principles of cash management in

domestic firms as well as in MNCs are
the same. However, the management of
cash in MNCs is a very complex and
challenging task in view of the movement
of funds across national borders.
04/19/2022 VIJAY 9
 An MNC collects cash from many sources
across countries and makes payments to
subsidiaries operating in different countries

 In transferring funds among the

subsidiaries or from the parent firm to the
subsidiary and vice versa, the MNC may
face foreign exchange restrictions, controls
imposed by governments and foreign
exchange rate fluctuations. Further,
differences in the tax laws of different
countries make the job of cash
management
04/19/2022 tough.VIJAY 10
 There may be a few more advantages for
MNCs. The funds of various subsidiaries
operating in different countries can be
virtually pooled and managed by the
centralized authority of the MNC., usually
the parent firm.
 The parent unit can also keep constant
watch over the cash balances with its
subsidiary units, and move funds from a
subsidiary that has excess liquidity to a
subsidiary that can absorb excess
liquidity.
04/19/2022 VIJAY 11
 Benefits of Good Cash
Management

 Control of financial risk

 Opportunity for profit
 Strengthened balance sheet
 Increased customer, supplier, and
shareholder confidence

04/19/2022 VIJAY 12
 EFFICIENCY OF CASH MANAGEMENT

 The efficiency of cash management,

whether in a domestic company or in an
MNC, is reflected in the collection and
disbursement of cash, as it is in these
two areas that cash holding can
economized.

04/19/2022 VIJAY 13
 1.Ex:- Assume that the average credit
sales of a company per day are Rs.75
million. If the company can speed up the
payment of its receivables by day, the
cash balance will increase by Rs.75
millions. If this additional cash is invested
to yield 4% return, the company will
generate an additional income of Rs.3
million per annum.

04/19/2022 VIJAY 14
 2. Ex:- A delay in the disbursement of
cash will result in substantial savings or
additional income to the company.
 As speed up collections and delaying
disbursement result in an increase in cash
balance that can be profitably utilized by
the company.
 FLOAT: It is the net effect (in terms of
money) of the delay in the payment of
cheques issued by a firm and/or the delay
in the collection of cheques issued by
others in favour of the firm. In a simple….
04/19/2022 VIJAY 15
 The MNC’s Cash Book balance may differ
from that of the bank Pass Book. This
difference is known as a float . There are
difference floats:
 1. DISBURSEMENT (POSITIVE) FLOAT:
cheque issued but not presented for
payment.
 2. COLLECTION (NEGATIVE) FLOAT:
cheque deposited but not collected.
 3. NET FLOAT: is the difference between
the disbursement float and collection float.

04/19/2022 VIJAY 16
 There are different sources of delay or
float:
 4. A cheque issued by firm may take some
time to reach the payee. This delay is
called mail float.
 5. The pay of the cheque may take some
time to process the cheque internally and
deposit it in the bank. Which is known as
processing float.
 6. Some amount of time is also
consumed in clearing the cheque it is
known as clearing float.
04/19/2022 VIJAY 17
 The firm should identify the various
sources of float and accordingly plan
and put efforts to take advantage of
each source so that the availability of its
usable funds will increase.

04/19/2022 VIJAY 18
 CASH COLLECTION
 Acceleration of cash collection is an
important aspect of cash management.
There are different methods, these include
LOCKBOX, CONCENTRATION
BANKING, AUTOMATIC DEBIT OR
PAYMENT BY WIRE.
 The LOCKBOX system is one of the
oldest and most widely used systems of
cash collection.
 An MNC may establish lockboxes in
different places around the world, or rent a
04/19/2022 VIJAY 19
a post box and authorize its local bank to
pick up the content in the box.
 Customers are requested to mail their
remittances to the lockbox. The local
bank opens the box one or more time
daily, collects the cheques, and process
them for clearance. The daily record of
receipts is communicated to the MNC
through an electronic data transmission
system.
 The firm needs to asses the advantages of the lockbox
system and its costs before deciding whether to use it.

04/19/2022 VIJAY 20
04/19/2022 VIJAY 21
CONCENTRATION BANKING
 The cash collection arrangement can be
either centralized or decentralized. In
the centralized system, the payers,
particularly customers, are instructed to
make remittances directly to a centrally
located collection centre.
 In the decentralized, the firm opens a
number of collection centers, they are
geographically spread for the
convenience of customers.
04/19/2022 VIJAY 22
 Customers are asked to send their
payments to a collection centre close to
them. The collection centre receives the
cheques from the customers and
deposits them with a local bank. The
funds are then transferred to the firm’s
disbursement bank accounts(s) or
concentration bank.
 The flow chart follows……………..

04/19/2022 VIJAY 23
04/19/2022 VIJAY 24
 The other systems are PAYMENTS BY
WIRE or AUTOMATIC ELECTRONIC
DEBITS.
 In this, the funds are automatically
debited from one account and credited to
another account.
 Development in communication
technology have played an important role
in advancing such systems.

04/19/2022 VIJAY 25
 CASH DISBURSEMENT
 Effective management of cash
disbursement can also increase the
availability of cash to the MNC.
 Cash management always strive
(struggle) to speed up cash collections
and slow down cash disbursement.
 But this should be done without
affecting its relations with customers
and suppliers.
04/19/2022 VIJAY 26
 Thereare different ways of controlling
disbursements, such as Zero-balance
Accounts and Electronic Fund Transfers.

 ZBA isan arrangement with a bank that

allows the firm to write cheques against a
bank containing zero balance. This facility
works well for MNCs that maintain a master
disbursing account to service subsidiaries.

04/19/2022 VIJAY 27
 Zero-balance accounts (ZBAs) are
disbursement accounts that always have
an end-of-day balance of zero.
 The purpose is to eliminate non-earning
cash balances in corporate checking
accounts.
 A ZBA works well as a disbursement
account under a cash concentration
system.

04/19/2022 VIJAY 28
Electronic Fund Transfers.
 With developments in information technology,
MNCs have been able to use the electronic
fund transfer system, under which all the
cash transactions of an MNC are recorded on
magnetic tape and cleared directly through an
automated clearing house.

 The Society for Worldwide Interbank

Financial Telecommunications (SWIFT)
provides a dedicated computer network to
support electronic fund transfers.

04/19/2022 VIJAY 29
 NETTING
 It is the process of reducing the number of
cash transactions among the affiliates, and
between the affiliates and the parent firms in
order to minimize transaction cost. It may be
bilateral or multilateral.
 There are a large number of inter-firm
transactions between subsidiary units, and
between subsidiary units and the parent firm.
If such transactions are to be settled on a
bilateral basis, a large number of currency
conversions would take place with substantial
transaction cost.
04/19/2022 VIJAY 30
 In bilateral (two-sided) netting, the net amount
due between each pair of affiliates ( between
the parent unit and a subsidiary, or between
two subsidiaries) is determined at the end of
each period, and only that net amount is
transferred.

 In the case of multilateral netting, each affiliate

nets all its receipts against all its payments and
then transfers or receives the balance,
depending on whether it is a net payer or
receiver at the end of each period. Net funds to
be received by all the affiliates will equal net
funds to be paid by all the affiliates.
04/19/2022 VIJAY 31
 Exposure Netting: an Example
Consider a U.S. MNC with three subsidiaries and
the following foreign exchange transactions:

$20
$30
$40
$10 $35 $10 $30 $40
$25
$60
$20
$30
 Bilateral Netting: an Example
Bilateral Netting would reduce the number of
foreign exchange transactions as follows;
Examine U.S and Canadian affiliate
$20
$30
USA CANADA
$40
$10 $35 $10 $30 $40
$25
$60
$20
UK
GERMAN $30
 Bilateral Netting: an Example
Bilateral Netting: U.S. and Canada net out at $10

$10

$40
$10 $35 $10 $30 $40
$25
$60
$20
$30
 Bilateral Netting: an Example
Bilateral Netting: Canadian and U.K. affiliates.

$10

$40
$10 $35 $10 $30 $40
$25
$60
$20
$30
 Bilateral Netting: an Example
Bilateral Netting: Canadian and U.K. affiliates net
out at $10

$10

$40
$10 $35 $10 $10
$25
$60
$20
$30
 Bilateral Netting: an Example
Bilateral Netting: U.K. and German affiliates.

$10

$40
$10 $35 $10 $10
$25
$60
$20
$30
 Bilateral Netting: an Example
Bilateral Netting: U.K. and German affiliates net
out at $10

$10

$40
$10 $35 $10 $10
$25
$60
$10
 Bilateral Netting: an Example
Bilateral Netting: U.S. and German affiliate.

$10

$40
$10 $35 $10 $10
$25
$60
$10
 Bilateral Netting: an Example
Bilateral Netting: U.S. and German affiliate net out
at $25.

$10

$40
$25 $10 $10
$25
$60
$10
 Bilateral Netting: an Example
Bilateral Netting: U.S. and U.K. affiliate.

$10

$40
$25 $10 $10
$25
$60
$10
 Bilateral Netting: an Example
Bilateral Netting: U.S. and U.K. affiliate net out at
$20.

$10

$20
$25 $10 $10
$25

$10
 Bilateral Netting: an Example
Bilateral Netting: German and Canadian affiliates.

$10

$20
$25 $10 $10
$25

$10
 Bilateral Netting: an Example
Bilateral Netting: German and Canadian affiliates
net out at $15

$10

$20 $15
$25 $10

$10
 Bilateral Netting
• Before bilateral netting:
– Total funds (gross) to be moved: $350

• With bilateral netting:

– Total funds (net) to be moved: $90

• This is a reduction of $260 in foreign

exchange transactions.
Multilateral Netting: an Example
Consider simplifying the bilateral netting with
multilateral netting: Start with the bilateral
amounts.

$10

$20 $15
$25 $10

$10
Multilateral Netting: an Example
U.K. affiliate owes the German affiliate $10; the
German affiliate owes U.S. $10.

$10

$20 $15
$15 $10 $10

$10
Multilateral Netting: an Example
Thus, the U.K. affiliate nets its payment to the U.S.
of $10.

$10

$20 $15
$15 $10
$10
Multilateral Netting: an Example
U.K. net payment of $10 to U.S. is combined with
the $20 it owes.

$10

$20 $15
$15 $10
$10
Multilateral Netting: an Example
U.K. affiliates owes $30 to U.S.

$10

$30 $15
$15 $10
Multilateral Netting: an Example
Consider Canadian and German affiliates.

$10

$30 $15
$15 $10
Multilateral Netting: an Example
Canadian affiliate owes German affiliate $15 and
the German affiliate owes the U.S. $15.

$10

$30 $15
$15 $10
Multilateral Netting: an Example
Canadian affiliate nets its payment to the U.S. of
$15; total Canadian affiliate payment to U.S.
$25.

$10
$15
$30
$10
Multilateral Netting: an Example
Consider Canadian and U.K. affiliate

$10
$15
$30
$10
Multilateral Netting: an Example
U.K. affiliate owes Canadian affiliate $10;
Canadian affiliate owes U.S. $10.

$10
$15
$30
$10
Multilateral Netting: an Example
U.K. affiliate nets its payment to the U.S. of $10.

$15
$30

$10
Multilateral Netting: an Example
Combine this $10 with the $30 the U.K. affiliate
owes the U.S.

$15
$30

$10
Multilateral Netting: an Example
U.K. affiliate owes the U.S. $40.

$15

$40
Multilateral Netting: an Example
Total funds to be moved under multilateral netting
is $55.

$15

$40
 Summary of Netting
Compare this (before netting).

$20
$30
$40
$10 $35 $10 $30 $40
$25
$60
$20
$30
 Bilateral Netting
To this.
Bilateral Netting: Total funds moved = $90

$10

$20 $15
$25 $10

$10
 Multilateral Netting
With this.
Multilateral netting: Total funds moved = $55

$15

$40
 Payment Netting

04/19/2022 VIJAY 63
 Payment Netting

04/19/2022 VIJAY 64
 Multilateral
netting presupposes the
existence of a centralized each
depository or at least a netting centre
manager.

 The netting centre manager or the

centralized cash depository nets out the
receivables against the disbursements of
each affiliate, and informs the net payers
to pay designated amounts to the net
receivers at a specified date.
04/19/2022 VIJAY 65
Benefits of Netting
 Studies have shown the following:
 Decrease in the expenses associated with
moving funds internationally.
 Decrease in the number of foreign
exchange transactions (also reduces
costs).
 Reduction in intra-company float (wire
transfers can take up to 5 days).
 Savings in administrative time.