INTERNATIONAL FINANCE ASSIGNMENT 1

SUBMITTED TO:Dr. Batani Raghavendra Rao

SUBMITTED BY:ANURAG SANTANI Reg. No. 11MMA6007 Batch 2011-2013

a). International cash management

Cash management is basically concerned with optimization of cash ows and investment of excess cash. From an international perspective, cash management is very complex because laws related to cross-border cash transfers differ among countries. In addition, exchange rate uctuations can affect the value of cross-border cash transfers. Financial managers need to understand the advantages and disadvantages of investing cash in foreign markets so that they can make international cash management decisions that maximize the value of the MNC. Efficient cash management and short-term financing are both important and beneficial to a company in order to maintain a competitive market share, which will increase profit potential and shareholder value through rising stock. (Source: Anthony Gambino, Industry feature, Cash management, August 1985)

Cash Flow Analysis: Subsidiary Perspective & parent perspective

Efficient working capital management (such as inventory, accounts receivable, and cash) has a direct inuence on the amount and timing of cash ow. Working capital management and the management of cash ow are integrated.

Subsidiary Expenses
It is concerned with outow payments by the subsidiary to purchase raw materials or supplies. Because of exchange rate uctuations, the subsidiary will normally have a more difficult time forecasting future outow payments if its purchases are international rather than domestic. Moreover, there is a possibility that payments will be substantially higher due to appreciation of the invoice currency. Hence, the rm may wish to maintain a large inventory of supplies and raw materials so that it can draw from its inventory and cut down on purchases if the invoice currency appreciates.

Subsidiary Revenue
If subsidiaries are export oriented i.e., export their products, their sales volume may be more volatile than if the goods were only sold domestically. This could be attributed to the uctuating exchange rate of the invoice currency. And as a result, importers demand for these nished goods will most likely decrease if the invoice currency appreciates. The sales volume of exports is also susceptible to business cycles of the importing countries. If the goods were sold domestically, the exchange rate uctuations would not have a direct impact on sales, al-though they would still have an indirect impact since the uctuations would inuence prices paid by local customers for imports from foreign competitors

Subsidiary Dividend Payments

The subsidiary may be expected to periodically send dividend payments and other fees to the parent. These fees could represent royalties or charges for overhead costs incurred by the parent that benet the subsidiary. When dividend payments and fees are known in advance and denominated in the subsidiarys currency, forecasting cash ows is easier for the subsidiary. The level of dividends paid by subsidiaries to the parent is dependent on the: liquidity needs of each subsidiary, potential uses of funds at various subsidiary locations, expected movements in the currencies of the subsidiaries and, regulations of the host country government.

Subsidiary Liquidity Management

After considering all outow and inow payments, the subsidiary will nd itself with either excess or decit cash. It uses liquidity management to either invest its excess cash or borrow to cover its cash decit. If it anticipates a cash decit, short-term nancing is necessary and if it anticipates excess cash, it must determine how the excess cash should

be used. Investing in foreign currencies can sometimes be attractive, but exchange rate risk makes the effective yield uncertain.

Centralized Cash Management

Centralized cash management team may need to monitor, and possibly manage the parent-subsidiary and inter subsidiary cash ows. This role is critical since it can often benet individual subsidiaries in need of funds or overly exposed to exchange rate risk. The centralized cash management division of an MNC cannot always accurately forecast events that affect parent-subsidiary or inter-subsidiary cash ows. It should, however, be ready to react to any event by considering: (1) Any potential adverse impact on cash ows and (2) How to avoid such an adverse impact. If the cash ow situation between the parent and subsidiaries results in a cash squeeze on the parent, it should have sources of funds (credit lines) available. On the other hand, if it has excess cash after considering all outow payments, it must consider where to invest funds. This decision is thoroughly examined shortly.

Techniques to optimize cash flows

Cash inows can be optimized by the following techniques: Accelerating cash inows Managing inter subsidiary cash transfers Managing blocked funds Minimizing currency conversion costs

Investing Excess Cash

Many MNCs have at least $100 million in cash balances across banks in various countries. If they can nd a way to earn an extra 1 percent or more on those funds, they

will generate an extra $1 million each year or more on cash balances of $100 million. Thus, their short-term investment decision affects the amount of their cash inows. Their excess funds can be invested in domestic or foreign short-term securities. In some periods, foreign short-term securities will have higher interest rates than domestic interest rates.

SOURCE:
Kesseven Padachi, An Analysis of Working Capital Structure and Financing Pattern of Mauritian Small Manufacturing Firms, Journal of Applied Finance. Jul2008, Vol. 14 Issue 7. Anita Agrawal, Cash Management Practices of Indian MNCs and Their Foreign Affiliates, The Icfai Journal of Applied Finance, Vol. 13, No. 12, 2007 Alan G Seidner, INVESTING EXCESS CASH: REDUCING SPECULATION, BUSINESS TODAY, Oct 1990 Mikhail Simutin , Excess Cash and Stock Returns Financial Management _ Autumn 2010

Randolph A. Pohlman, Emmanuel S. Santiago, and F. Lynn Market, Cash Flow Estimation Practices of Large Firms , FINANCIAL MANAGEMENT/SUMMER 1988

b). Receivables Management

With creation of receivables the firm gets a few advantages and most importantly it gets strength to bear bad debts, administrative expenses, financing costs etc. In the management of receivables financial manager should follow such policy through which cash resources of the firm can be fully utilized. Management of receivables is a process under which decisions to maximize returns on the investment blocked in them are taken. Thus, following are the main objectives of receivables management:-

 To optimize the amount of sales. To optimize investment in receivables. To minimize cost of credit.

Payables management
A substantial part of purchases of goods and services in business are on credit terms rather than against cash payments. While the supplier of goods and services tend to perceive credit as a lever for enhancing sales or as a form of non-price instrument of competition, the buyer tends to look upon it as a loaning of goods or inventory. The objectives of this are to: Explain the significance of payables as a source of finance. Identify the factors that influence the payable quantum and duration. Highlight the advantage of payable and provide hints for effective management of payable.

Working capital financing issues

Size of cash balances Industrial Category Size of Firm Currency denominations of cash balances

SOURCE: Jonathan Evan, Increase Cash Flow by Selling Receivables, Financial planning, Sept 2007 Jeffrey Struzensk, Centralize Treasury Management, Centralize Treasury

Management, March 2006 vol. 22

Daniel P O'Neill, Centralized Scheduling,Unanticipated revenue cycle opportunity, Sep2007, Vol. 61 Issue 9, p82-87. Receivables Management Financial Executive,EBSCO, Jan/Feb2008, Vol. 24 Mark Prysock, Top Issues Facing Corporate Treasurers Today, BUSINESS TODAY, Nov2003, Vol. 19 Issue 8