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International cash management

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  • 1. INTERNATIONAL CASH MANAGEMENT PART-IPRESENTED BY BHAWANA BHARDWAJ
  • 2. Cash is the most liquid current asset. All other current assetssuch as receivables and inventory ultimately get converted intocash. Therefore, business should keep optimal cash balance atevery point of time. It should neither be in excess nor short ofits requirements. The term cash management includes:Determination of optimum amount of cash required in thebusiness.Keep the cash balance at optimum level and investment ofsurplus in profitable manner.Prompt collection of cash from receivables(i.e. from debtorsand bills receivables) and efficient disbursement of cash.Cash is one of the current assets of business. It is needed atall times to keep the business going. A business concernshould always keep sufficient cash for meetings itsobligations. Any shortage of cash will hamper the operationsof a concern and any excess of it unproductive.
  • 3. For the purpose of cash management, the term cash not only includes coins,currency notes,cheques,bank drafts, demand deposits with banks but also the ‘near-assets’ like marketable securities and time deposits with banks because they can be readily converted into cash. For the purpose of cash management, near-cash assets are also included under cash because surplus cash required to be invested in near-cash assets for the time being.
  • 4. Transaction motive:- A number of transactionstake place in every business. Some of thetransactions result in cash outflows such aspayments for purchases, wages, operatingexpenses ,financial charges like interest, taxes ,dividends etc. Similarly , some transaction result incash inflows such as receipts from sales, receiptsfrom sales, receipts from investments, otherincomes etc. To meet the shortage of cash insituation when cash outflows exceed cash inflows,the business must have an adequate cash balance.
  • 5. In every business, some cash balance is kept as a precautionary measure to meet any unexpected contingency. These contingency may include following: Floods ,strikes and failures of important customers. Unexpected slow down in collection from debtors. Cancellation of orders by customers. Sharp increase in cost raw-materials. Increase in operating costs etc.
  • 6. In business, some cash is kept in reserve to take advantage of profitable opportunities which may arise from time to time. These opportunities are: Opportunity to purchase raw material at low prices on payment of immediate cash. Opportunity to purchase securities when their prices are low. Opportunity to purchase other assets for the business when their prices are low.
  • 7. Banks provide a number of services to the business such as clearance of cheques, supply of credit information about other customers, transfer of funds and soon . Bank charge commission or fee but they require indirect compensation. For this purpose, banks do not require indirect compensation. For this purpose, banks require the clients to maintain a minimum balance in their accounts in the bank.
  • 8. Timing of cash flows:-the need for maintaining cash balances arisesbecause cash inflows and cash outflows take place at different place atdifferent times. If cash inflows perfectly match cash outflows, i.e.if they takeplace at same time, there would be no need for keeping cash balancesCash shortage costs:-cash budgets would reveal the quantum as well asperiods of cash shortages. Every shortages of cash involves a costdepending upon the quantum and duration of shortfall. Costs incurred as aresult of shortfall of cash are called cash shortage costs.Cash excess costs:-if a firm keeps a cash balance in excess of itsrequirements, it will miss opportunities to invest it elsewhere. As a result itwill lose interest which it would otherwise have earned by investing excesscash elsewhere. This factor should also be considered in determining thelevel of cash and therefore the level of cash should not be determined inexcess.Cash management costs:-cash management also involves some costs suchas salary, clerical expenses etc.of cash management staff. Cash need shouldbe determined after considering this factor also.Uncertainty:- cash flows can never be predicted with complete accuracyand there is always some uncertainty in their forecast such as unexpecteddelay in collection from debtors. Firms must always keep some additionalcash to meet these uncertainties.
  • 9.  To maintain optimum cash balance:- The maintain objective of cash management is to determine the optimum cash balance required in the business to determine the optimum cash balances. Hence, an optimum level of cash should be determined by considering all the requirements of cash in the business. To keep the optimum cash balance requirement at minimum level:- the second main objective of cash managemnt is to minimize cash balance requirement because cash is non-earning asset.This objective is achieved by managing the cash flows in such a manner that cash is collected promptly and liabilities are paid in time.
  • 10.  Prevents insolvency of the business arising due to non-payment of its obligations on time. Helps in availing the advantage of favourable business opportunities. Business can meet its contingencies. Adequate cash balance helps in availing of the cash discount by making the payment within due date. Help in fostering good relations with the creditors by making prompt payment to them. By maintaining adequate bank balance, the relationship with the bank is not strained.
  • 11. INTERNATIONAL CASH MANAGEMENT PART-II PRESENTED BY BHAWANA BHARDWAJ
  • 12. The management of cash basically involves four steps as follows:-Assessment of the cash requirements:-the first step in internationalmanagement is to establish the need for cash during a specific period,which may a week, a fortnight, or a month. It is computed on the basisof expected amount of cash disbursement vis-à-vis expected inflow ofcash during a particular period. The outflow and inflow of cash occursmainly on account of various transactions. The firm holds cash also tomeet precautionary and determined on the basis of experience and thegeneral trend of the business environment.Steps involved in assessment of cash needs:-A cash budget is prepared for each subsidiary.After assessing the cash needs of each of the subsidiaries. Thefigures are consolidated in order to assess the cash need of the firm asa whole. It is because in a multinational enterprise. It is a cash flow ofthe firm as a whole that is taken into account and which needs to bemanaged.
  • 13. OPTIMIZATION OF CASH NEEDS:-after the preparation of cash budget and the estimation the cash arequirement, the firm needs optimization of cash level at different units. It can be done in three ways:INTRA-FIRM TRANSFER OF CASH:- WHEN A PARTICULAR UNIT FACES A SHORTAGE OF CASH,IT GETS ITFROM CASH SURPLUS UNIT, MAY IT BE PARENT UNIT OR ANY OTHER SISTER SUBSIDIARY. IT MAY RAISEFUNDS FORM OUTSIDE THE FIRM IF OUTSIDE THE FIRM IF OUTSIDE FUNDS ARE CHEAPER AND EASIER THANTHE INTRA-FIRM FLOW OF CASH IN VIEW GOVERNMENTAL RESTRICTION ON SUCH FLOWS. HOWEVER, THEUNIT OFTEN PREFERS INTRA-FIRM TRANSFER OF CASH IN VIEW OF THE FACT THAT THE SURPLUSES OF THEOTHER UNITS ARE UTILIZED. THIS IS PERHAPS WHY FUNDS ARE TRANSFERRED FROM ONE UNIT TO THEOTHER. THE MODES ARE:TRANSFER PRICING: ARBITRARILY DETERMINED PRICE NORMALLY FOR INTRA-FIRM TRANSFER OF GOODSAND SERVICES WHICH IS QUITE DIFFERENT FROM ARM’S-LENGTH PRICE(THE PRICE AT WHICH A SELLERTRANSACTS WITH AN UNRELATED BUYER. NORMALLY, IT IS BASED ON COST/ MARKET PRICE.) AND WHICHIS DONE FOR THE PURPOSE OF REDUCING OVERALL TAX AND TARIFF BURDEN AS ALSO FOR THE WORKINGCAPITAL MANAGEMENT.LEADS AND LAGSLEADING:- SHORTENING CREDIT TERM IN NUMBER OF DAYS.LAGGING:-EXTENDING OR ENLARGING OF THE DAYS OF CREDIT.PARALLEL LOANS:-SIMULTANEOUS BORROWING AND LENDING INVOLVING FOUR-RELATED PARTIES INTWO COUNTRIESCHANGES IN THE RATE OF ROYALTY.DIVIDEND AND SOON.ACCELERATING INFLOWS AND DELAYING OUTFLOWSACCELERATING INFLOWS AND DELAYING OUTFLOWSACCELERATING INFLOWS AND DELAYING INFLOWS: THERE ARE TWO TYPES OF DELAYS IN COLLECTION OFCASH. ONE IS THE MAILING DELAY AND OTHER IS THE PROCESSING DELAY. IN COLLECTION FROM ACROSSTHE BORDER, LONG PROCEDURAL FORMALITIES AND GOVERNMENTAL RESTRICTIONS TOO COME IN THEWAY.FOR ACCELERATING INFLOWS FOLLOWING METHODS ARE USED:
  • 14.  CABLE REMMITTANCES ESTABLISHMENT OF COLLECTION CENTRES LOCK-BOX SYSTEM REDUCTION OF PROCESSING DELAY PRE- AUTHORIZED PAYMENT SYSTEM DELAYING OUTFLOWS AVOIDANCE OF EARLY PAYMENTS CENTRALIZED DISBURSEMENT
  • 15. DELAYING OUTFLOWS: PAYMENT SHOULD BEMADE AS LATE AS POSSIBLE WITHOUT DAMAGING THE GOOD WILL AND CREDIT RATING OF THE FIRM. THERE ARE CERTAIN TECHNIQUE TO SLOW THE DISBURSEMENT: AVOIDANCE OF EARLY PAYMENTS CENTRALIZED DISBURSEMENTS
  • 16. NETTING OF INTRA-FIRM PAYMENTS:- ANOTHER STEP TOWARDS LESSENING THE REQUIREMENTS FOR CASH AT A PARTICULAR POINT OF TIME IS TO ENCOURAGES NETTING OF INTRA-FIRM PAYMENTS.THERE IS USUALLY A LARGE VOLUME OF INTRA-FIRM PAYMENTS. SUCH PAYMENTS REQUIRED NOT ONLY A HUGE AMOUNT OF CASH, BUT ALSO TRANSACTION COST, INTER CURRENCY CONVERSION COST AND OPPORTUNITY COST OF FLOAT.The different units of a firm require cash not only for making payments but also for meeting such costs. Netting is a solution of this problem. Netting is in fact the elimination of counter payments. This means that only net amount is paid.
  • 17. AB C
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  • 20. The cash balance for precautionary and speculative purposes is fixed and so it is held in the form of near-cash assets or near-cash assets or short term marketable securities. The reason is that near-cash assets earn for the firm and are definitely preferable to an idle cash balance. In this context, a few questions need to be probed. They are: Should the surplus cash balance of the entire firm centralised and only then invested?
  • 21.  How much of the surplus cash balance should be invested in near-cash assets? Which currency should be preferred for investment? Centralization:- the process of centralization of surplus cash can take two forms. One is the centralized control of the parent company over the surplus cash of different units. In this case, cash does not actually move to a centralized pool, but its movement to a cash-deficit unit or for investment in near-cash assets is strictly guided by the parent company. The other form manifests in the actual movement of cash to a centralized pool.
  • 22.  Surplus cash should not lie idle. It should be invested. The larger the investment, the greater the interests earned, but at the same time the great risk is illiquidity. Lower the investment, liquid will improve but earning on the investment will be lower.Thus,an optimal division of funds between cash andnear-assets requires between liquidity and profitability.while making an investment in near-assets, the international finance manager.Has to take care of number of facts, or which the following are important:
  • 23.  Portfolio should be diversified so as to maximize yield for a given level of risk. The portfolio should be reviewed daily so as to decide which particular investment has to be liquidated or which particular securities should be remain undistributed. Investment should only be made in assets where liquidity prevails. The maturity structure should coincide with the need for cash so that securities can be easily converted back into cash whenever the need for fresh cash arises.
  • 24. Normally , the surplus cash invested in a country where the interest rate is high. However,the answer is not so simple. In fact, the firm has to take into accounts the effective yield/return that depends not simply on the rate of interest but also on the changes in the exchange rate. If the currency of the country where the funds are invested depreciated vis-a- vis the home- country currency, the return in terms of home country currency will be lower. More often, a firm makes multiple-currency will be lower. More often, a firm makes multiple-currency will investments and reaps the benefit of diversification.