12.working capital management

8/8/2019 12.Working Capital Management

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Current AssetManagement and

Short-Term Financing


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P ART 1

International CashManagement


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INTERNATIONAL CASHMANAGEMENT

I. INTERNATIONAL CASHMANAGEMENT

A. Seven Key Areas Involve Issuesabout1. Organization2. Collection/Fund Disbursement

3. Interaffiliate Payments4. Investment of Excess Funds5. Optimal Global Cash Balances6. Cash Planning/Budgeting

7. Bank Relations


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B. Goals of an International CashManager: similar to domestic

manager1. Quick and efficient cash control

2. Optimal conservation and usage

response


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Issue (#1): Centralize OrganizationIssue (#1): Centralize Organization1. Advantages:

a. Efficient liquidity levelsb. Enhanced profitability

c. Quicker headquarter


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1. Advantages (cont)

d. Decision making enhanced

e. Better volume currency quotes

f. Greater cash management

expertise

g. Less political risk


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Issue (#2): Collection/Disbursement ofIssue (#2): Collection/Disbursement ofFundsFunds

1. Key Element: Accelerate collections2. Acceleration Methods:

a. Electronic fund transfers

b. Mobilization centers


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3. Methods to Expedite Cash Payments

a. Wire cash transfers

b. Establish accounts in clients bank

c. Negotiate with banks

- obtain value dating


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

UseP

ayments Netting1. Definition:-offset payments of affiliate

receivables/payables

-net amounts only are transferred.


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Issue (#4): Excess Funds InvestmentIssue (#4): Excess Funds Investment1. Major task:

a. determine minimum cash

balancesb. short-term investment of

excess balances


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2. Requirements:a. Forecast of cash needs

b. Knowledge of minimum

cash position


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3. Investment SelectionCriteria:

a. Degree of Governmentregulations

b. Market structure

c. Leniency of Foreign tax

laws


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Issue (#5) Optimal Global CashIssue (#5) Optimal Global CashBalancesBalances

1. Establish centrally managed cashpool

2. Require affiliates to hold minimumamounts


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3. Benefits of Optimal Global CashBalances

a. Less outside borrowing needed

b. More excess fund for investment

c. Reduced internal expense

d. Reduced currency exposure


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Issue (#7) Bank RelationsIssue (#7) Bank Relations

1. Good Relations Will Avoid

a. Lost interest incomeb. Overpriced services

c. Redundant services


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2. Common Bank Relations Problems

a. Too many banks

b. High costs

such as compensatingbalances

c. Inadequate reporting

d. Excessive clearing delays


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ACCOUNTS RECEIVABLEMANAGEMENT

II. ACCOUNTS RECEIVABLEMANAGEMENT

A. Trade Creditsextended in anticipation of profit by

1. expanded sales volume

2. retaining existing customers


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INVENTORY MANAGEMENT

III. INVENTORY MANAGEMENTA. Problems:

MNCs seem to have more

difficulties due to1. Long,variable transits

2. Lengthy customs procedures


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B. Issue: Production Location 1.1. Overseas location may lead to

higher inventory carrying costs

due toa. larger amounts of work-in-

process

b. more finished goods2. Why?


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D. Reason for Stockpiling:

reduce risk of shipping delays

E. Results of Stockpiling:

Higher carrying costs

F. Solution to higher carrying costs:

Adjust affiliates profit margins to reflectadded costs.


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P ART 2

Short-Term Financing


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SHORT-TERM FINANCING

IV. SHORT-TERM FINANCING

A. Strategy1. 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


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B. Key Factors1. Deviations from Intl Fisher Effect?

a. If yes

trade-off required between cost andexchange risk

b. If no

costs are same everywhere


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2. Does Interest Rate Parity Hold?

a. Yes. Currency is irrelevant.

b. No. Cover costs may differ-added risk may mean theforward premium/discount doesnot offset interest rate

differentials.


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3. Political Risk: If high,

a. MNCs should

1.) maximize localfinancing.

2.) Faced with confiscationor currency controls,

fewer assets at risk


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SHORT-TERM FINANCINGOBJECTIVES

C. Short-Term Financing Objectives

1. Possible Objectives:

a. Minimize expected cost.b. Minimize risk without regard

to cost.


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D. Short-Term Financing Options1. Three Possibilities

a. Inter-company loansb. Local currency loans

c. Euro market


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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


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EFFECTIVE INTEREST RATE

3. Calculating Interest Costs

a. Effective interest rate (EIR):

- most efficient measureof cost

b. Basic formula:

EIR = Annual Interest PaidFunds Received


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Sample Problem #1

Pro Logic Co. receives a loan for $10,000 at11% 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%


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Sample Problem #2 Discounting the loanPro Logic Co. receives a loan for $10,000 at 11% on adiscounted basis for one year. What is the EIR?

EIR = $1,100 (10,000x.11)

$8,900 10,000-1100

= 1100

8900

= 12.4%


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Sample Problem #3: Compensating BalancesPro Logic Co. receives a loan for $10,000 at 11% witha 15% compensating balance requirement for oneyear. What is the EIR?

EIR = $1,100 (10,000x.11)

$8,500 10,000-1500

= 1100

8500= 12.9%


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COMMERCIAL PAPER

4. Non-bank lending : CommercialPapera. Definition:

short-term unsecured promissorynote 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

12.working capital management

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