MATS INSTITUTE OF MANAGEMENT & ENTREPRENUERSHIP

AN ASSIGNMENT ON

“INTRNATIONAL FINANCE”

SUBMITTED TO

Dr.Batni Ragahavendra Rao

SUBMITTED BY

AMORJYOTI SAIKIA

09MMA4012
International Cash Management
Objectives of International and Domestic Cash Management are same. They are as
follows-
• Bringing the company’s cash resources within control as quickly and efficiently as
possible and
• Achieving the optimum conservation and utilization of these funds.
The major difference between the two is that-
1) Wider scope
2) Recognizing the customs and practices of other countries.
But movement of money across national borders is not easy. There are some restrictions
that impedes free flow of money in and out of the country. Examples are U.S Office of
Foreign Direct Investment, Germany’s Bardepot etc. Other complicating factors include
multiple tax jurisdiction and currencies and the relative absence of internationally
integrated exchange facilities. Following are the 7 key areas of International Cash
Management-
1. Organization
Following are the advantages to organization:
• All decisions can be made using overall corporate benefit as the criterion.
• By reducing total assets, profitability is enhanced and financing costs reduced.
• Excess liquidity is eliminated and absorbed.
• By increasing forex transactions done through HQ, banks provide better forex
quotes.
2. Collection and Disbursement of funds
Accelerating collections both within a foreign country and across borders is a key
element of international cash management. Considering either national or international
collections, accelerating the receipt of funds usually involves the following
1) Defining and analyzing different available payment channels.
2) Selecting the most efficient method.
 3) Giving specific instructions regarding procedures to the firm’s customers and

banks. (use of cable remittances)

3. Netting of Interaffiliate payments
The importance of physical flows of raw material, products etc to the international
finance executive is that they are accompanied by a heavy volume of interaffiliate fund
flows. Many costs are associated with cross border fund transfers like cost of purchasing
foreign exchange. Thus there is clear incentive to minimize the total volume of
intercompany fund flows. This can be achieved by payment netting. There are 2 types of
netting viz. bilateral and multilateral.
4. Management of Short term Investment Portfolio
International cash management also involves the wise investment of excess funds. There
are three types of portfolio management available to international cash managers:
1) A zero portfolio where all excess funds of subsidiaries are remitted to the parent and
then used to pay the parent’s short-term debts.
2) Cash management can be centralized in third countries such as tax haven countries.
3) Cash management can be centralized at headquarters with subsidiaries holding only
minimum amounts of cash for transactions purposes.
If MNCs invest funds in marketable securities such as Treasury bills, they should follow
sound portfolio guidelines:
1) Instruments in the short-term investment portfolio should be diversified to
maximize yield for a given amount of risk or to minimize risk for a given amount
of return.
2) For companies that hold marketable securities for near-future needs of liquidity,
marketability considerations are of major importance.
3) The maturity of the investment should be tailored to the company’s projected cash
needs.
4) The securities chosen should be limited to those with a minimum risk of default.
5) The portfolio should be reviewed daily to decide what new investments will be
made and which securities will be liquidated.
 5. Optimal Worldwide cash levels (Centralized cash management)

Centralized cash management or cash pooling calls for each local subsidiary to hold at
the local level the minimum cash balance for transaction purposes. All funds not needed
for transaction purposes are channeled to a central cash center. The cash center is
responsible for placing a central pool of funds in those currencies and money market
instruments that will best serve the needs of the MNC on a worldwide basis. There are a
number of advantages to centralized cash management over decentralized cash
management:
1) The central cash center can collect information more quickly and make better
decisions on the relative strengths and weaknesses of various currencies.
2) Funds held in a cash center can quickly be returned to a subsidiary with cash

shortages via wire transfer or by providing a worldwide banking system with full
collateral in hard currency. It eliminates the possibility that one subsidiary will
borrow at higher rates while another holds surplus funds idle or invests them at
lower rates.
3) By holding all precautionary balances in a central cash center, an MNC can reduce
the total pool without any loss in the level of production. This is due to a
synergistic effect that is said to exist when the whole is worth more than the mere
sum of its parts
6. Cash Planning and Budgeting
It includes timely reporting of cash receipts, forecasting in timely comprehensive and
accurate manner, knowing the financial position of affiliates, local and international
monetary conditions and likely currency movements.
Multinational Cash Mobilization is a system designed to optimize the use of funds by
tracking current and near term cash position. The information gathered here can be used
to aid multilateral trading system, to increase operational efficiency of centralized ash
pool etc.
 7. Bank Relations
Good bank relations are central to a company’s international cash management effort.
Some companies are pleased by their bank services whereas others do not realize that
they are being poorly served by bank. Some common problems in bank relations are
1) Too many relations
2) High banking costs
3) Inadequate reporting
4) Excessive clearing delays

Cash Flow analysis from subsidiary and parents perspective

There are different channel to move funds
1) Fund flows from parent to subsidiary.
• Largest flow is the initial investment.
• Can also be loans or added investments
• Purchase of goods from the parent is another option
2) Fund flows from subsidiary to parent.
• The flow of funds consists of dividends, interest on loans, principal reduction
payments, royalty payments, license fees, technical services fees, management
fees, export commissions, and payment for goods received from the parent.
• Parents do not have total control over the size of the flow of funds because of
external factors such as foreign exchange controls and tax constraints.
3) Fund flows from subsidiary to subsidiary.
• The flow of funds consists of loans to each other or the buying of goods.
• Funds from one subsidiary may be used to establish another.

Accounts Receivable Management

Firms grant credit to customers, both domestically and internationally, because they
expect the investment in receivables to be profitable, either by expanding sales volume or
by retaining sales that otherwise would be lost to competitors. The level of accounts
receivable depends upon the volume of credit sales and the average credit period and
these two variables depend upon credit standards, credit terms, and collection policy.
Accounts receivable have a cost in terms of foregone interest.
MNCs have problem with currency value changes and the account receivable managers
should take actions to reduce this risk, either through currency denomination or the use of
factors.
• The seller may require that payments be made in currencies likely to face little or
no devaluation.
• Factoring is a process whereby a company sells its account receivable on a
nonrecourse basis.
• The factors bear risk and perform services such as credit checking, bookkeeping,
and the collection of accounts.
Management of account receivable from independent buyers involves two types of
decisions:
• The denomination of currency to be used for payment.
• The terms of payment.
Management of account receivable from intracompany sales differ from sales to
independent buyers in that little concern is given to credit standing and that the timing of
the payments may depend upon a company’s desire to allocate resources rather than
normal payment schedules.

Issues in Working Capital Management

The administration of the firm’s current assets and financing needed to support those
assets is called as working capital financing.
Gross Working Capital= Firm’s investment in current assets.
Net Working Capital= Current assets (-) Current liabilities
Following are its issues:
 Higher borrowing costs.
 Some businesses lack the credit quality to borrow on an unsecured basis and must

instead pledge collateral to obtain a loan.

 Inventory financing involves higher transaction and administrative costs than

other loan instruments.

 Since a longer
 Repayment period poses more risk to lenders, term loans carry a higher interest

rate than short-term loans.

 When provided with a floating interest rate,
 Term loans expose firms to greater interest rate risk since the chances of a spike in

interest rates increase for a longer repayment period.