CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING
Transcript of CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING
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Multinational Financial Management Alan Shapiro7th Edition J.Wiley & SonsPower Points byJoseph F. Greco, Ph.D.California State University, Fullerton
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CHAPTER 19CURRENT ASSET MANAGEMENT AND SHORT-TERM FINANCING
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CHAPTER OVERVIEW
I. INTERNATIONAL CASH MANAGEMENT
II. ACCOUNTS RECEIVABLE MANAGEMENT
III. INVENTORY MANAGEMENTIV. SHORT-TERM FINANCING
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I. INTERNATIONAL CASH MANAGEMENT
I. INTERNATION CASH MANAGEMENTA. Seven Key Areas:1. Organization2. Collection/Fund Disbursement3. Interaffiliate Payments Netting4. Excess-Funds Investment5. Optimal Global Cash Balances6. Cash Planning/Budgeting7. Bank Relations
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INTERNATIONAL CASH MANAGEMENT
B. Goals of an International Cash Manager1. Quick/efficient cash control2. Optimal conservation/usage
C. Organization: Centralize1. Advantages:a. Efficient liquidity levelsb. Enhanced profitabilityc. Quicker headquarter action
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INTERNATIONAL CASH MANAGEMENT
1. Advantages (con’)d. Decision making enhancede. Better volume currency quotesf. Greater cash managementexpertiseg. Less political risk
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INTERNATIONAL CASH MANAGEMENT
D. Collection/Disbursement of Funds1. Key Element: Accelerate collections2. Acceleration Methods:a. Cable remittancesb. Mobilization centersc. Lock boxesd. Electronic fund transfers
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INTERNATIONAL CASH MANAGEMENT
3. Methods to Expedite Cash Payments
a. Cable remittancesb. Establish accounts in client’s
bankc. Negotiate with banks
- obtain value dating
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INTERNATIONAL CASH MANAGEMENTE. Payments Netting
1. Definition:offset payments of affiliate receivables/payables so that net amounts only are transferred.2. Create Netting Centera. a subsidiary set up in a locationwith minimal exchange controls
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INTERNATIONAL CASH MANAGEMENT
2. Netting Centers (con’t)b. Coordinate interaffiliate
payment flowsc. Center’s value is a direct
functionof transfer volume.
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INTERNATIONAL CASH MANAGEMENT
F.Excess Funds Investment1. Major task:a. determine minimum cashbalancesb. short-term investment ofexcess balances2. Requirements:a. Forecast of cash needsb. Knowledge of minimumcash position
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INTERNATIONAL CASH MANAGEMENT
3. Investment Selection Criteria:a. Government regulationsb. Market structurec. Foreign tax laws
G. Optimal Global Cash Balances1. Establish centrally managed cashpool2. Require affiliates to hold minimum
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INTERNATIONAL CASH MANAGEMENT
3. Benefits of Optimal Cash Balancesa. Less borrowing neededb. More excess fund investmentc. Reduced internal expensed. Reduced currency exposure
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INTERNATIONAL CASH MANAGEMENT
H. Bank Relations1. Good Relations Will Avoid
a. Lost interest incomeb. Overpriced servicesc. Redundant services
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INTERNATIONAL CASH MANAGEMENT
2. Common Bank Relations Problemsa. Too many banksb. High costssuch as compensating balancesc. Inadequate reportingd. Excessive clearing delays
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II. ACCOUNTS RECEIVABLE MANAGEMENT
II. ACCOUNTS RECEIVABLE MANAGEMENTA. Trade Credit
extended in anticipation of profit by
1. expanded sales volume2. retaining existing customers
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ACCOUNTS RECEIVABLE MANAGEMENTB. Credit Terms Should Consider
1. Sales force2. Adjusting bonuses for cost
of credit sales.
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III. INVENTORY MANAGEMENTA. Problems:
Seem to be more difficult due to
1. Long,variable transits2. Lengthy customs
procedures
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INVENTORY MANAGEMENTB. Production Location/Inventory Control
1. Overseas locationmay lead to higher inventory carrying costs due toa. larger amounts of work-in-processb. more finished goods
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INVENTORY MANAGEMENTC. Advance Inventory Purchases
1. Usually where there are noforward hedges available2. Another hedging method:advance inventory purchases ofimported items, i.e. inventory stockpiling.
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INVENTORY MANAGEMENTd. Reason for Stockpiling:
greater risk of delaye. Solution to higher carrying
costs:Adjust affiliate’s profit
marginsto reflect added costs.
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IV. SHORT-TERM FINANCINGIV. SHORT-TERM FINANCING
A. Strategy1. Identify: key factors2. Formulate/evaluate:
objectives3. Describe: available options4. Develop a methodology:
to calculate/compare costs
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SHORT-TERM FINANCINGB. Key Factors
1. Deviations from Int’l Fisher Effect?a. If yestrade-off required betweencost and exchange riskb. If nocosts are same everywhere
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SHORT-TERM FINANCING2. Exchange Risk
a. Offset foreign assets withforeign liabilities
b. Borrow where no exposureincreases exchange risk
3. Firm’s Risk Aversiondirect relation to price incurred
to reduce exposure
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SHORT-TERM FINANCING4. Does Interest Rate Parity Hold?a. Yes. Currency is irrelevant.b. No. Cover costs may differ-added risk may mean theforward premium/discountdoes not offset interest ratedifferentials.
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SHORT-TERM FINANCING5. Political Risk: If high,
a. MNCs should 1.) maximize local financing.
2.) Faced with confiscation or currency controls,
fewer assets at risk.
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SHORT-TERM FINANCINGC. Short-Term Financing Objectives
1. Four Possible Objectives:a. Minimize expected cost.b. Minimize risk without regardto cost.c. Trade off expected cost andsystematic risk.d. Trade off expect cost and total risk.
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SHORT-TERM FINANCINGD. Short-Term Financing Options
1. Three Possibilitiesa. Inter-company loansb. Local currency loansc. Euro market
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SHORT-TERM FINANCING2. Local Currency Financing: Bank Loansa. Short-term in naturerole of cleanup clauseb. Forms1.) Term loans2.) Line of credit3.) Overdrafts4.) Revolving Credit5.) Discounting
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SHORT-TERM FINANCING3. Calculating Interest Costsa. Effective interest rate (EIR): most efficient measure of costb. Basic formula:EIR = Annual Interest Paid Funds Received
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SHORT-TERM FINANCING4. Commercial Papera. Definition:short-term unsecured promissorynote generally sold by large MNCs on a discount basis.b. Standard maturitiesc. Bank fees charged for:1.) Backup line of credit2.) Credit rating service