• to explain common complications in optimizing cash flows; and
• to explain the potential benefits and risks of foreign investments.
3
Cash Flow Analysis: Subsidiary Perspective
8
Centralized Cash Management
• While each subsidiary is managing its own working capital, a centralized cash management group is needed to monitor, and possibly manage, the parent-subsidiary and intersubsidiary cash flows. (Exhibit 9.1)
4
Cash Flow Analysis: Subsidiary Perspective
Subsidiary Expenses • International purchases of raw materials or
supplies are more likely to be difficult to manage because of exchange rate fluctuations, quotas, etc. a larger inventory is thus required by MNC compared with domestic firms. • If the sales volume is highly volatile, larger cash balances may need to be maintained in order to cover unexpected demato explain the difference between a subsidiary perspective and a parent perspective in analyzing cash flows;
• to explain the various techniques used to optimize cash flows;
7
Cash Flow Analysis: Subsidiary Perspective
Subsidiary Liquidity Management • After accounting for all cash outflows and inflows,
the subsidiary must either invest its excess cash or borrow to cover its cash deficiencies. • If the subsidiary has access to lines of credit and overdraft facilities, it may maintain adequate liquidity without substantial cash balances.
5
Cash Flow Analysis: Subsidiary Perspective
Subsidiary Revenue • International sales are more likely to be
volatile because of exchange rate fluctuations, business cycles, etc. • Looser credit standards may increase sales (accounts receivable), though often at the expense of slower cash inflows.
• International cash management can be segmented into two functions:
– optimizing cash flow movements, and – investing excess cash.
• The management of working capital has a direct influence on the amount and timing of cash flow :
– inventory management – accounts receivable management – cash management
6
Cash Flow Analysis: Subsidiary Perspective
Subsidiary Dividend Payments • Forecasting cash flows will be easier if the
dividend payments and fees (royalties and overhead charges) to be sent to the parent are known in advance and denominated in the subsidiary’s currency.
Chapter 9
International Cash Management
1
Objectives
This chapter emphasizes the decisions involved in management of cash by an MNC. The additional opportunities and risks of cash management for an MNC versus a domestic firm should be stressed. The specific objectives are: