MANAGING SHORT-TERM

INTERNATIONAL FINANCIAL
TRANSACTIONS

By

Sojan Jose
R
Sreehari
It is the process of planning and controlling the level and mix of current
assets of the firm as well as financing of these assets

It involves the use of certain prescribed aids such as

•Risk-return tradeoff
•Credit Standards
•Inventory models

Management of working capital can viewed as either as

assets
Static responsibility or dynamic flow process

The static approach focuses on individual processes such as management

of cash, account receivable and inventories

Dynamic approach focuses on transfer of liquid funds from one

geographic locations or currency to another
Objective of WCM is to determine

 Optimal amount of investment in various current asset

accounts
 It is the level of current asset holdings that maximizes
return on investment
 To provide various current assets and short term credit
necessary to support the anticipated sales by minimizing
the investment in current assets

Constraints faced by MNC’s

Political, tax, foreign exchange, inflation and interest rates

 International Cash Management
 It is defined as the cross border movement of funds from and
to other companies as well as within the company

Cash management is divided into two

 Movement of money
 Movement of information relating to the movement of money

Ground rules for a well designed cash management program

 A cash management center that receives and distributes timely

information relating to cash movements within the bank
accounts
 Short payment channel involving minimum number of banks
allow for maximum control
 Modern communication systems are used
 Efficient bank with high standards of customer service are
employed

Cash management is divided in to four areas

 Collection
 Disbursement
 Intercompany payments
 Control
 Collection
Cash Managers motto is

“As soon as the customer has initiated payment to us, the money is
ours “

 Typical method is to establish collection accounts close to the

customers
 These collection points are called “lock boxes”
 International collection systems require collection accounts in
the countries of the currencies of the payment not neccassrily in
the countries of customer

Example:
A German company with dollar receivable on a British buyer should
receive the funds on a US collection account rather than channeling
the dollars to its local bank
 Transfer Pricing

 Transfer pricing is the rates or prices that are utilized when

selling goods or services between company divisions and
departments, or between a parent company and a
subsidiary
 Generally, transfer pricing is considered to be a relatively
simple method of moving goods and services among the
overall corporate family.
 Trade between related firms is called intrafirm trade
 When intrafirm trade crosses national borders, it is called
international transfer pricing
 International transfer pricing is the valuation of
crossborder transactions between units of a multinational
enterprise.
 International Transfer Pricing
 Objective of International transfer pricing is tax
minimization
 Economic advantage can be attained if transfer price shifts
profit from country with high tax rate to a country with low
tax rate
 Other objectives of transfer pricing involves
 Profit maximization
 Performance evaluation

 Factors that influence transfer pricing

 Import duties
 Avoidance of financial problems
 Currency fluctuations
 Import Duties
 Company benefits if it transfer products at low prices to a

country with high import duties

 It can reduce total cost by reducing import duties
 Reducing import duties does not always guarantee profit
 Sometimes countries with low import duties will have high tax
and vice versa
 Balancing import duties and income taxes is more complicated
than minimizing taxes
 Different prices may draw attention of custom and income tax authorities
 This will lead to
 This may lead to review of pricing practices
 Company suffers great deal of bad publicity
 Avoiding Financial Problems
 Transfer pricing can help to overcome economic restriction
placed by countries
 Countries place restriction on the amount of profit that can
leave the country
 The best way around is to charge high price for imports
 Countries disallow certain expenses against taxable income
 An example is companies disallow certain expenses if they are
incurred in some other country
 Transfer pricing can help to improve financial condition of an
affiliate
 Low transfer prices can provide affiliate a competitive edge
during startup period of a new venture
 Currency Fluctuations

 Currency instability can affect the performance report of

foreign affiliates
 Currency fluctuation should be taken into account while
deciding the transfer price
 Indexing formula is applied to arrive at a transfer price
 NTP= OTP X (CER/PER)
 NTP- new transfer price
 OTP- old transfer price
 CER- current exchange rate
 PER-Planned exchange rate
 Indexing formula can isolate exchange fluctuations
 What factors affect MNC’s transfer pricing?
 Overall profit to the company is the most important factor

 Other factors

 Competitive position of subsidiaries of foreign countries

 Performance of subsidiaries
 Restriction imposed by governments
 Interest o local partners in foreign subsidiaries

 Less influential factors

 Inflation rate
 Volume of interdivisional transfer
 Domestic government requirements on direct foreign investments
 Intercompany Payments
 Payment among group companies have greater degree of control by the cash
manager.

 Eg: subsidiary A => B cheque transfer, A has float benefit but group suffers.
(out of control for cash & Foreign exchange mgmt purposes).

 A => B takes a week to complete causing interest lost in A & B, hence out of
control.

 Payment systems generally used

 Fixed intercompany payment day for a month
 All foreign exchange conversion through 1 bank
 Multilateral netting system

• Type of system depends on

 Structure of companies cash flow, form of organization, savings
 generated. Few banks have know-how to implement these systems
Inter company payments

 When foreign exchange dealings are numerous & complex, the group may
provide a captive finance company or reinvoicing company to take over the
receivables of the entire group.
 Loan to be arranged between group companies at such rates that both the
companies are at a benefit.

Control

 Control Problems faced

 fragmented banking system

 separate international & domestic banking operating system
 only monthly statement of account available.
 International Receivables Management

 Level of receivables depends on`

 Volume of credit sales
 Average collection period

 These in turn depend on credit standards, credit term & collection policy

 In theory the credit standard shall be liberalized to such extent so that

Marginal profit on increased sales = Marginal cost of credit

 MNC sell for credit for sales, volume expansion & profits

 Multinational Accounts receivables 2 types

 sales to outside the corporate group
 Intra company sales
 Sales

 Account receivables from independent buyer involves 2 decisions :

 Denomination of currency used for payment
 Terms of payment

 Domestic sales in domestic currency

 Export sales in either importer currency or exporter currency or in third country

currency

 Exporter will prefer strongest currency while the importer the weakest, hence a
tradeoff between the currency and terms of payment takes place
 International Inventory Management

 Inventory represents a significant segment of total assets

 Least liquid of current assets

 Inventory management depends on

 the level of sales
 the length of production cycle
 durability of the product

 In domestic operated countries the carrying cost & stock out

cost is minimized.
 Companies that reply on imported inventories maintain over
stock inventories due to
 fears of continued inflation
 raw material shortages
 number of environmental constraints
Protective measures against inflation

 MNC that relies heavily on imported goods shall seek to built up

maximum number of parts & equipment before any devaluation of
currency is done.

 MNC that relies heavily on export goods shall seek to minimize the
number of parts & equipment before any devaluation of currency is
done

Pricing

 Due to exchange rate fluctuations a company can take 2 steps

 Step1 : maintain the original price of inventory to undercut competition

 Step 2: increase price of inventory to earn dollar profit( qty of goods

sold might reduce)
Reducing vulnerability towards inflation & devaluation

 When inflation continues and devaluation is imminent then

cash balance should be minimum & foreign debt conversion in
convertible currency should be liquidated.

 when host government is about to put foreign exchange

controls remittance shall be increased & any excess fund
must be turned in asset.

 speed up collection process & delay payments.

 If funds are needed on short term basis need to get it from

local banks.

 During high price increase level loans from banks are

unobtainable hence need to pledge inventory to get local
currency. Else the overdraft facility shall be used.