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Managing Working Capital The job of the cash manager is minimizing working capital while maintaining adequate liquidity.

In the simplest of terms it is to accelerate cash receipts and delay cash disbursements. The cash manager has a variety of internal and external tools available to accomplish this. Internal tools include policies, procedures, administrative practices and terms of trade. External tools include products offered by third parties. The internal tools apply to the areas of purchasing, receiving, inventory management, accounts receivable and accounts payable. Many of the internal tools discussed here are administrative processes or procedures that simplify, control and create efficiency. Many of these tools are not practical in a small private company however the discipline of following the general rules will be of increasing benefit as the company grows in size and scope. It is therefore recommended that owners and managers be aware of these tools and apply them whenever the opportunities arise. Administrative tools Owners and cash managers can reduce administrative costs by centralize purchasing for the firm or at least within major business units. Standardize purchasing policies and procedures help prevent duplicate purchase orders. Purchase order forms should be standardized. Copies of all purchase orders should be forwarded to Accounts Payable and Receiving immediately upon creation. When negotiating with vendors the cash manager should first negotiate price, then terms. The purchasing department should coordinate with accounts payable to maximize leverage on vendor. Supply disruptions must be prevented because they can bring sales and cash flow to a halt. Companies should use multiple suppliers when possible. Cash managers should know the suppliers financial condition so they can anticipate potential disruptions due to financial stress. Signs of supplier financial trouble include calls to the supplier not being returned, consistent order errors or deterioration in quality of merchandise, late delivery of merchandise and supplier employees inquiring about job openings. Cash managers can enhance cash flow by taking simple steps in the Receiving department. Receiving should already have a copy of the purchase order at time goods are received. Steps should be taken to minimize paperwork errors in the receiving department. All goods should be examined immediately upon arrival and checked against the purchase order. Received goods should immediately be committed to inventory and entered into accounting system. Shipping documents should be forwarded to Accounts Payable immediately upon receipt and inspection of the goods. In managing accounts receivable centralize collection efforts within the firm or at least within major business units. This means employing a dedicated collection staff. Have the staff call customers frequently to inquire about payment if the payment is late. The customer will not be offended if it is already late. Process all customer remittances immediately dont allow them to be put into a drawer until the next day. Deposit collections daily if not using a lock box.

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Make it easy for the customer to pay. Provide return envelopes with invoices. Get customer authorization to make automatic debits. Make arrangements to accept wire transfers, credit card payments and depository transfer checks. A/P processing should be centralized for the firm or at least within major business units. Policies and procedures for handling A/P should be standardized across the company. These policies and procedures should prevent overpayments, duplicate payments or payments to fictitious vendors. Vendor invoices should be processed immediately upon receipt. They should be compared with the shipping documents and original purchase orders to ensure that amounts being billed are consistent with the goods ordered and received. Only then should they be entered into the A/P system. Avoid rush checks because they disrupt work flow and are the leading cause of duplicate payments. Coordinate A/P with purchasing to maximize leverage on vendor. A prompt payment can sometimes win a better price or discount. Inventory tools There are a number of things an owner or cash manager can do to reduce the cost of carrying inventory and turn it into cash more quickly. Some of these things are simple and work in any size business. Other things are more appropriate for larger or businesses with greater structure and resources. Business owners and cash managers should be aware of all of them. The easiest thing to do is to turn stale or slow moving inventory into cash. This can be done by discounting inventory to move quickly, having a warehouse sale or returning the inventory to the vendor. Simply writing down impaired inventory can save cash even if it is not sold because a book loss is created that will reduce income taxes now or in the future. In todays electronic environment almost all companies that stock goods can benefit from the use of just-in-time inventory systems. Whether we it is ordering finished product ready for sale or components used in a manufacturing process, such systems can free up cash that otherwise would be tied up in inventory. The benefits of using such a system include: 1. 2. 3. 4. 5. 6. 7. Reduced inventory levels and increases turnover; Reduced purchasing lead time and safety stocks; Increased scheduling flexibility; Lower investment in factory and warehouse space; Reduced obsolescence; Reduced scrap and rework; and Reduced operating expense.

Potential negatives of using such systems include: 1. Order lead times require accurate planning 2. Changes in amounts and dates disrupt suppliers plans and create additional costs 3. Poor planning can result in inventory overages or shortages a. Overages tie up cash b. Shortages reduce sales, profits and cash flow

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Companies that manufacture the products that they sell should consider buying vs. building. The advantages include a reduced investment in inventory, the elimination of manufacturing costs and overhead and potentially a lower cost of goods sold. The disadvantages outsourcing manufacturing include: a) Advanced deposit or letter of credit requirements; b) Potential delivery delays that can costs sales, profit and cash flow; and c) Potential product errors or poor quality that can create returns and customer dissatisfaction. Companies that outsource their manufacturing often can also use Electronic Data Interchange (EDI) to reduce inventory requirements. EDI accelerates ordering and shipping because suppliers have access to inventory ledger. Suppliers are pre-authorized to ship specified quantities when inventory declines to specified level. Invoicing is done electronically. Inventory management should involve an analysis of Economic Order Quantity (EOQ). In small companies the business owner can do this with an Excel spreadsheet. Larger companies require complex inventory management systems. Ordering inventory (or supplies for that matter) costs money in terms of purchasing, shipping & handling, receiving, accounting and related operational costs. Carrying costs include housing, handling, insurance, shrinkage, record keeping, cost of invested capital and related operational costs. The theory behind EOQ is that ordering costs are inversely related to carrying costs. Small, frequent orders increase ordering costs but reduce carrying costs. Large, infrequent orders minimize ordering costs but increase carrying costs. EOQ analyzes the cost of ordering inventory versus the cost of carrying inventory in an effort to determine the optimal amount and frequency of ordering. EOQ will be discussed in more detail in a future article discussing modeling. Few things increase the cost of inventory and the use of related cash like defective products. Defects cause waste, inefficiency and rework. They cause companies to reduce order quantities and order more frequently thereby increasing costs. Defective production can sometimes be minimized by using one or two high quality suppliers for each inventory item. Fewer suppliers reduce ordering costs resulting in fewer orders and increased Economic Order Quantities. Total order and inventory carry costs decline. Effective inventory management is essential to any company seeking optimal utilization of its cash resources. It is particularly important in small companies which are cash constrained and high growth companies that need to maximize the internal generation of cash resources to fund growth. Accounts receivable tools There are a number of things an owner or cash manager can do to reduce the cost of carrying accounts receivable and turn it into cash more quickly. Some of these things are simple and work in any size business. Other things are more appropriate for larger or businesses with greater structure and resources. Business owners and cash managers should be aware of all of them. Credit check each new customer and credit check all customers at least once each year. Monitor non-payment aggressively and dont be afraid to cut a customer off for non-payment. Call delinquent customers daily and do not be afraid to use COD terms.

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Offering discounts to customers for early payment is a very effective way to accelerate cash receipts but it can be expensive. The key is to calculate the appropriate discount to offer. The annualized cost of the discount should be less than the companys incremental cost of capital. The formula to determine true cost of a discount is: (Percent discount x 365)/days gained in cash receipt Therefore, if the terms are 2% 10, net 30 then: .02 x 365/20 = 7.3/20 = 36.5% In this case if the companys incremental cost of capital exceeds 36.5% then the discount should be offered. As the table below shows, offering an enticing discount to pay within 30 days is clearly expensive. It is therefore critical that customers be prevented from taking the discount after the early pay date.

A preferable alternative to accelerate cash flow may be to borrow against the accounts receivable under a working capital line of credit. For most companies this would cost less than 36.5% per annum. However, many companies do not have access to a line of credit and even some that do would prefer to offer the discount and preserve availability under the line of credit for inventory financing or unexpected working capital requirements. Cash management services are generally provided by banks as a means of accelerating the collection, deposit and investment of your funds. These services generally consist of lock boxes, operating accounts, sweep accounts, on-line reporting and investment services. More recently banks are offering in-house check scanning and on-line deposit services as an alternative to lock boxes. Lock boxes and in-house check scanning accelerate the deposit and availability of customer payments. Every night deposits in excess of a pre-determined minimum balance are swept into a sweep account for overnight investment. Earnings on the invested funds are then applied to the cost of other services provided by the bank (item charges, wire transfers, stop

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payments, etc.). This minimizes excess cash balances and maximizes investment income. Online information systems give the owner or cash manager access to daily activity. Effective accounts receivable management is essential to any company seeking optimal utilization of its cash resources. It is particularly important in small companies which are cash constrained and high growth companies that need to maximize the internal generation of cash resources to fund growth. Accounts payable and working capital credit lines The effective management of Accounts Payable and credit lines by an owner or cash manager can greatly enhance cash flow. Some things are simple and work in any size business. Other things are more appropriate for larger or businesses with greater structure and resources. Business owners and cash managers should be aware of all of them. Issue checks from small banks, thrifts or credit unions in remote locations to improve mail and clearing float. With electronic clearing this is now less important but it could help to pick up one or two days additional float. Take discounts when available if the incremental cost of capital is less than the annualized yield equivalent of the discount. Remember, a 2% discount taken 20 days before the payment is due equals a 36.5% annualized yield. A 1% discount taken 20 days before the payment is due equals an 18% annualized yield. The chart below provides the annual percentage yield on various discounts taken.

Used properly working capital lines of credit are an important tool for maximizing cash flow. They provide cash to finance seasonal increases in inventory and accounts receivable. During these periods the cash helps to keep vendors happy thereby maintaining favorable relationships and credit ratings. In essence, credit lines turn inventory and accounts receivable into cash before the completion of the cash cycle.

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Working capital credit lines are obtained from banks and asset based lenders. Banks are insured depository institutions and their business is highly regulated. As a result they have higher credit standards and their loan agreements usually come with more restrictive covenants and conditions. Asset based lenders do not take deposits and are not regulated to the extent banks are. This enables them to make loans that banks may not be willing or able to make. As a result loans from asset based lenders usually carry a higher interest rate. Banks and asset based lenders both advance funds against a formula equaling a percentage of accounts receivable and inventory. Banks look to cash flow as their primary source of repayment and because they view these lines of credit as seasonal they expect they will be paid off at least once a year. Asset based lenders generally look to the assets as the primary source of repayment and so long as they are comfortable with the quality of the assets they generally dont require an annual cleanup. Because both types of lenders ultimately look to the assets, working capital lines of credit are almost always done on a secured basis. A security interest is taken in the accounts receivable and inventory, and in many cases the borrower is required to pledge all of its assets. From an operational standpoint the main difference between the two lenders is the amount of reporting required. Because asset based lenders are primarily looking at the value of the assets as their source of repayment they require much more frequent and detailed reporting. They take control of all receipts and deposit them into an account they control. Surplus cash is used to pay down the credit line. When the company needs cash it must apply for a new advance and submit the required supporting documentation. If the advance is made it is then deposited by the lender into the companys operating account. Because working with an asset based lender is so much more operationally intensive the added administrative expense makes borrowing even more expensive. It is therefore worthwhile to shop around extensively for a bank credit line before accepting one from an asset based lender. Effective utilization of working capital lines of credit is essential to any company seeking to maximize cash flow. It is particularly important in small companies which are cash constrained and high growth companies that need to ensure that cash resources are continually available to fund growth.

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Inventory Models Inventory modeling as a way to manage and enhance cash flow can be useful in both small and large companies. In small companies the business owner can do some of the less complex modeling with an Excel spreadsheet. Larger companies require complex inventory systems. Irrespective of the size of the company business owners and cash managers should know how models can be used to predict the optimal amount of inventory on hand to maximize cash flow and minimize interest expense. The most common models are the Reorder Point, Inventory Optimization and Economic Order Quantity (EOQ) models. Reorder Point Model (ROP) Reorder point is a predetermined amount of inventory on hand that when reached automatically triggers an order for more inventory in a fixed amount. To use this model a business owner or cash manager must be able to accurately predict the lead time between order and merchandise receipt. The reorder point is computed as follows: ROP = lead time x average usage per unit of time (week, month, etc.) This formula indicates the inventory level at which a new order should be placed. If a safety stock is required it should be added to ROP after the calculation is made. Example A company uses 20,000 pieces of inventory evenly throughout the year. It takes one month from the time an order is placed to receive the goods. Management wants to keep a buffer stock of 500 units on hand. The reorder point is: ROP = 1 x (20,000/12) + 500 = 1 x 1,667 + 500 = 2,167 units When the inventory level falls to 2,167 units a new order should be placed for 1,667 units. Inventory Optimization Often a company can increase sales by increasing the amount of inventory on hand. This is usually when the inventory increase will reduce back-orders and increase deliveries. This is the opportunity cost of not carrying sufficient inventory. Of course keeping additional inventory on hand increases carrying costs so the object of the exercise is to determine the optimal amount of inventory that will result in the greatest incremental income at the least increase in carrying cost. To make this determination a manager must be able to estimate the increase in sales volume resulting from an increase in inventory, know the companys variable costs as a percent of sales, and know the financing costs associated with the increased inventory. The formula would be: (S x (1-C)) (I x i) = N Where: S = increase in sales resulting from the increase in inventory C = variable costs as a percent of sales

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I = increase in the value of inventory i = financing cost of inventory (usually interest on short term borrowing) N = Net Savings Example A company has average inventory of $75,000 and annual sales of $900,000. Management believes that increasing inventory would result in increased sales up to a point as back orders get filled and deliveries increase. Following the laws of diminishing returns estimates are that inventory increases would produce the following sales results: I $0.00 $10,000 $10,000 $10,000 $10,000 Inventory $75,000 $85,000 $95,000 $105,000 $115,000 Sales $900,000 $1,000,000 $1,040,000 $1,070,000 $1,090,000 Turnover 12.0 11.8 10.9 10.2 9.5

The companys variable cost as a percent of sales is 60% and its interest expense on short term borrowings is 12%. Determine the optimal amount of inventory to carry. S $0.00 $100,000 $40,000 $30,000 $20,000 I $0.00 $10,000 $10,000 $10,000 $10,000 (S x (1-C)) $0.00 $40,000 $16,000 $12,000 $8,000 (I x i) $0.00 $1,200 $1,200 $1,200 $1,200 N $0.00 $38,800 $14,800 $10,800 $6,800

The optimal amount of inventory to carry is $85,000 because the $10,000 increase from current levels produces the greatest net savings. Economic Order Quantity (EOQ) EOQ attempts to determine the amount of inventory to purchase with each order to minimize total inventory cost. Ordering inventory costs money in terms of purchasing, shipping & handling, receiving, accounting and related operational expense. Carrying costs include housing, handling, insurance, shrinkage, record keeping, cost of invested capital and related operational costs. The theory behind EOQ is that ordering costs are inversely related to carrying costs. Small, frequent orders increase ordering costs but reduce carrying costs. Large, infrequent orders minimize ordering costs but increase carrying costs. EOQ analyzes the cost of ordering inventory versus the cost of carrying inventory in an effort to determine the optimal amount and frequency of ordering. In graphic form the optimal Economic Order Quantity is where the cost of ordering line intersects the cost of carrying line as depicted below.

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The EOQ formula is: 2SO/C Where: S = annual usage of inventory O = ordering cost per order C = carrying cost per unit per year. The number of orders per year formula is: S/EOQ Order frequency in days can be determined by the formula: 360/orders per year In a perfect world orders would be placed at regular intervals in amounts as determined by the above formula. This would result in a least cost average inventory level with minimized ordering costs as graphically depicted below.

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But the world is not perfect or predictable so many companies choose to maintain a safety stock of inventory to absorb any unexpected usage or delays in inventory shipments. The impact of safety stocks and irregular usage can be depicted in the following graph. In the first inventory cycle inventory usage suddenly increases thereby depleting the safety stock. Depletion of the safety stock causes acceleration of the next order. In the fourth inventory cycle goods arrive late which again causes usage of the safety stock. This again causes acceleration of the next order.

EOQ is a necessary precursor to a JIT inventory system. However it does have its limitations, chief among them being that it can model only one type of inventory at a time and assumes that the item arrives and is used on a uniform and predictable basis throughout the year. It also assumes that revenues are not dependent on the level of inventory maintained (i.e. more inventory equates to more sales), and that no discounts are taken for quantity purchases. Still, even with these limitations EOQ is a useful tool. Lets use an example. 28

Example 1 A company uses 250,000 units of an item each year provided by a local supplier. Each order costs $100 to place. It costs $10 to carry each item. Determine the economic order quantity, orders per year, order frequency and average inventory using the EOQ formula. The solution is: EOQ = 2SO/C = (2x250,000x100)/10 = 5,000,000 = 2,236 per order

Number of orders per year = S/EOQ = 250,000/2,236 = 112 orders Order frequency = 360/orders per year = 360/112 = 3.2 days Average inventory = EOQ/2 = 2,236/2 = 1,118 units The company would place an order approximately every 3 days for 2,236 units. Note that the square root in EOQ formula suggests there are economies of scale in inventory investment. To see the economies of scale assume the company now uses 350,000 units per year. Example 2 Determine again the economic order quantity, orders per year, order frequency and average inventory using the EOQ formula and denote the economies of scale. Inventory usage increased by 40% but EOQ only increased by 18%. EOQ = 2SO/C = (2x350,000 x 100)/10 = 7,000,000 = 2,646 per order

Number of orders per year = S/EOQ = 350,000/2,646 = 132 orders Order frequency = 360/orders per year = 360/132 = 2.7 days Average inventory = EOQ/2

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= 2,646/2 = 1,323 units Using this model and extrapolating the economies of scale out to infinity it can be seen that the theoretical inventory level using a just-in-time inventory system is zero. Building off of inventory models are cash models. Like inventory there is an economic cost of maintaining too much cash, too little cash and frequent investment transactions (buying and selling cash to meet cash needs). Cash models will be discussed in the next section.

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Cash Models Modeling can also be useful in predicting the optimal amount of cash on hand to maximize cash flow and minimize interest expense. The most common models are the Baumol cash model and Miller-Orr cash model. Baumol Model Developed by William Baumol it is a derivative of the EOQ model. It is used to determine the optimal amount of cash to hold in a predictable environment. It treats cash as inventory and buying and selling investment transactions as ordering costs. The objective is to minimize the fixed cost of buying and selling investment transactions and minimize the opportunity cost of holding too much cash. Just like in EOQ Baumol is a two-step formula. Step one is to determine the optimal transaction size. Step two is to determine the optimal number of transactions in a period. Average cash holdings would be one half of the optimal transaction size. Baumol formula is same as the EOQ formula except transaction cost is substituted for order cost and interest cost is substituted for carry cost. The formula is: Z = 2NF / i Where: Z = the zero point to which the cash balance returns (the EOQ) N = the annual cash need (the usage rate, S) F = the fixed cost of each cash-securities transaction (the order cost, O) i = the annual interest rate on marketable securities The Baumol model can be depicted by the graph on the following page. The amount of cash to be held is that point where the combined cost of cash transactions and the opportunity cost of holding cash are the least.

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As with the EOQ model, the average amount of cash to be held and the frequency of securities transactions can be depicted in a graph as shown below. Should the company have an unexpected need for cash it will have to sell securities to raise cash earlier than it anticipated. An example shows how the formula works. Example A company has $5,000,000 per year in total cash disbursements. It costs $75 on average every time securities are sold for cash. Calculate the Zero point, the number of transfers each year, the frequency of transfers and the average cash holdings, if the current short term investment rate is 5%. Zero point = Z = 2NF / I = 2 x 5,000,000 x 75 / .05 = 15,000,000 = $38,730 (max cash) Number of transfers per year = N/Z = 5,000,000 / 38,730 = 129 transfers Transfer frequency = 360/number of transfers = 360 / 129 = 2.8 days Average cash balance = Z/2 = 38,730 / 2 = $19,365 In this case the company would replenish cash from securities approximately once every 3 days with each transaction being $38,730. Baumol represents a good first try to the cash holdings problem. It is easy to use and understand. It is useful when cash in and out is constant and predictable. But it suffers from some shortcomings. It relies on a constant cash flow which is unrealistic. It ignores the possibility of accumulating excess cash. Transaction costs are not always fixed. Miller-Orr Model This model seeks to overcome the shortcomings of the Baumol model. It determines the optimal amount of cash to hold in an unpredictable environment. It extends the Baumol model in that it tracks both inflows and outflows of cash, allows inflows and outflows on an irregular and

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unpredictable basis and establishes two trigger points - the lower cash level at which securities must be sold to replenish cash and the upper cash level at which surplus cash should be invested. Miller-Orr is not concerned with the frequency of the securities transactions. It is trying to determine the optimal time to buy or sell securities based on the amount of cash on hand. MillerOrr takes into consideration the fixed cost of securities transactions and assumes these costs are the same when both buying and selling, the daily interest rate on marketable securities and the variance of the daily net cash flows. The formula is: Z = 33F2/4i +LCL Where: Z = Zero Point the cash balance return point F = Fixed cost of each securities transaction i = Interest rate per day on marketable securities 2 = Statistical variability of the net daily cash flow LCL = Lower cash limit (established by management) The upper cash limit, or UCL, is established by the formula UCL = 3Z 2(LCL) The average cash balance is established by the formula (4Z LCL) / 3 The Miller-Orr model can be depicted by the following graph:

Example

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A company has $5,000,000 per year in total cash disbursements. It costs $75 on average every time securities are sold for cash. The cash manager estimates that the variance of change in the daily cash flow balance is $200,000. He also establishes that the lower cash limit is $5,000. Calculate the Zero point, the upper cash limit and the average cash balance if the current short term investment rate is 5%. Answer: I LCL Z = .05/365 = .000137 = $5,000 = 33F2/4i + LCL = 3(3 x 75 x 2,000,000) / (4 x.000137) + 5,000 = 3(8.21168E+15) + 5,000 = 20,175 + 5,000 = $25,175 = 3Z (2 x 5,000) = 75,525 10,000 = $65,525

UCL

Average cash balance = (4Z 5,000) / 3 = 95,700 / 3 = $31,900 The upper cash limit, or that point where the company buys securities with cash over and above that amount, is $65,525. The lower cash limit set by management is $5,000 at which point the company sells securities to raise cash. The average cash balance is $31,900. Effective modeling is not essential to any company seeking optimal utilization of its cash resources but it can help if used properly. It is particularly useful to large and rapidly growing companies that have complex cash management requirements. It can also be useful to small companies which are cash constrained. However business owners must be careful not to lose touch with actual day to day cash flow challenges for the sake of modeling. One could model oneself right out of business.

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Multinational and Resource Based Companies Cash management in a multinational company presents its own special challenges. Cash managers must deal with multiple currencies, country risk, inflation disparities, local versus parent control, multiple financing options, multiple tax codes, multiple regulatory environments, remittance decisions, currency and capital controls and transfer pricing considerations. Multinational resource based companies have even greater special challenges. Below are some of the considerations for cash managers in multinational organizations. Exchange rate Exchange rate fluctuations greatly affect cash flow and therefore investment returns. If a local currency declines against the value of the home currency the value of any local currency investments and cash flow generated by such investments declines in terms of the home currency. If the cash flow declines in value then the return on investment also declines. Exchange rates are influenced by economic, inflation and interest rate disparities between industrialized countries. They are generally most stable between industrialized countries and newly industrialized countries. Exchange rates are often difficult to determine and are sometimes arbitrary in underdeveloped countries. Another issue affecting exchange rates is convertibility and capital controls. Prior to making investment decisions cash managers should determine if the local currency is convertible and at what rate. Cash managers must also know prior to making an investment decision if local capital controls permit the remittance of capital out of the country and if so what the tax consequences might be. Country risk Country risk should also be considered by the cash manager before making investment decisions. Such considerations would include the liquidity of capital markets, legal, institutional, social constraints, economic constraints, corruption and the prospect of government interference or expropriation. Inflation disparities should also be considered. Inflation can be volatile in underdeveloped countries and can even be volatile in industrialized countries. Cash managers must also understand the limitations, if any, of parent company control of local company operations. Financing decisions In a multinational environment financing decisions are complex. Does it make more sense to borrow locally or at the parent level? What about using an offshore financing vehicle? What is the near term and long term outlook for the local currency given current economic outlook and inflation differentials? If the foreign assets are denominated in a foreign currency does it make sense for the liabilities to be denominated in the parent or other currency? The cash manager must answer all of these questions. Tax considerations These are critically important to cash management in the multinational company. Such issues as home country versus local country tax differentials must be analyzed. The tax treatment of earnings repatriation must be understood at both the local and parent level. Is tax treatment governed by treaty between the parent company government and the local company government? Tax treaties are common among developed countries but are unusual between developed and

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underdeveloped countries. They are rare between underdeveloped countries. When treaties do not exist they generally call for local companies to be taxed on worldwide accrued income and foreign companies to be taxed on local accrued income. Without tax treaties there is a possibility of double taxation tax by both the parent and local governments on local income. The timing of tax payments also greatly impact cash flow. The cash manager must understand if local taxes are paid upon accrual, upon remittance to the home country or upon exit from the investment. The cash manager also must know if the payments are due monthly, quarterly or annually. Remittance of profit This is a big issue for the cash manager to consider. Where is the cash needed and when? What are tax consequences of remittances both locally and at the parent company level? What are the risks of retaining cash in foreign country? Do capital controls prevent the remittance of profits? Transfer pricing In a multinational company transfer pricing has big implications for the cash manager. Significant amounts of cash can be moved between parent and local companies through the transfer pricing mechanism. Likewise, transfer pricing can be used as a tool to minimize taxes in the higher tax jurisdiction. In determining transfer pricing the cash manager should consider where cash is needed, where it should be allowed to accumulate and the respective profits tax rate in the parent and local countries. Resource based companies There are special cash management issues for the cash manager in resource based companies to consider. Their product is a commodity priced in US dollars and subject to extreme price volatility. There is a futures market for the commodity which enables the implementation of hedging strategies to make cash flow more predictable. But hedging requires taking future positions that may or may not turn out to be true. Resource based companies generally engage in production, refining and distribution. Often the commodity is produced in one country, refined in another and sometimes distributed in a third. The production expenses are paid in local currency, the commodity is purchased with US dollars, transportation expenses are paid in US dollars or another hard currency depending on the transporter and refining and distribution expense is incurred in the local currency. Commodity transportation poses additional issues. Transportation time creates additional risks. Commodity prices and exchange rates can change during transportation. This created additional hedging requirements. In addition to all the other factors a cash manager must consider, the economics and logistics of the resource based company place demands on the job that are extraordinary. They generally can be handled by only the most experience cash managers with access to the most sophisticated cash management tools.

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