19.

INTERNATIONAL CASH MANAGEMENT

Organization
When compared with a system of autonomous operating units, a fully centralized international
cash management program offers a number of advantages:
l The corporation is able to operate with a smaller amount of cash, pools of
excess
liquidity are absorbed and eliminated, and each operation will maintain transactions
balances only and not hold speculative or precautionary ones.
l By reducing total assets, profitability is enhanced and financing costs are reduced.
l The headquarters staff, with its purview of all corporate activity, can recognize
problems
and opportunities that an individual unit might not perceive.
l All decisions can be made using the overall corporate benefit as the criterion.
l By increasing the volume of foreign exchange and other transactions done
through
headquarters, firms encourage banks to provide better foreign exchange quotes
and
better service.
l Greater expertise in cash and portfolio management exists if one group is
responsible
for these activities.
l Less can be lost in the event of an expropriation or currency controls restricting
the
transfer of funds because the corporations total assets at risk in a foreign country can
be reduced.
Many experienced multinational firms have long understood these benefits. Today, the
combination of volatile currency and interest rate fluctuations, questions of capital
availability,
increasingly complex organizations and operating arrangements, and a growing emphasis on
profitability virtually mandates a highly centralized international cash management
system.
There is also a trend to place much greater responsibility in corporate headquarters.
Centralization does not necessarily mean that corporate headquarters has control of
all facets of cash management. Instead, a concentration of decision making at a
sufficiently high level within the corporation is required so that all pertinent information is
readily available and can be used to optimize the firms position.

Collection and Disbursement of Funds

Accelerating collections both within a foreign country and across borders is a key
element of international cash management. Material potential benefits exist because long
delays often are encountered in collecting receivables, particularly on export sales, and in
transferring funds among affiliates and corporate headquarters. Allowing for mail time
and bank processing, delays of eight to 10 business days are common from the moment an
importer pays an invoice to the time when the exporter is credited with good funds
that is, when the funds are available for use. Given high interest rates, wide fluctuations in
the foreign exchange markets, and the periodic imposition of credit restrictions that have
characterized financial markets in some years, cash in transit has become more expensive
and more exposed to risk.
With increasing frequency, corporate management is participating in the establishment

of an affiliates credit policy and the monitoring of collection performance. The principal
goals of this intervention are to minimize floatthat is, the transit time of paymentsto
reduce the investment in accounts receivable and to lower banking fees and other
transaction costs. By converting receivables into cash as rapidly as possible, a company can
increase its portfolio or reduce its borrowing and thereby earn a higher investment return or
save interest expense.
Considering either national or international collections, accelerating the receipt of
funds usually involves (1) defining and analyzing the different available payment
channels; (2) selecting the most efficient method, which can vary by country and by
customer; and (3) giving specific instructions regarding procedures to the firms customers and
banks.
In addressing the first two points, the full costs of using the various methods must
be determined, and the inherent delay of each must be calculated. Two main sources of
delay in the collections process are (1) the time between the dates of payment and of
receipt and (2) the time for the payment to clear through the banking system. Inasmuch
as banks will be as inefficient as possible to increase their float, understanding the
subtleties of domestic and international money transfers is requisite if a firm is to reduce
the time that funds are held and extract the maximum value from its banking
relationships. Exhibit 19.1 lists the different methods multinationals use to expedite their
collection of receivables.
Payments Netting in International Cash Management
Many multinational corporations are now in the process of rationalizing their production on a
global basis. This process involves a highly coordinated international interchange of
materials, parts, subassemblies, and finished products among the various units of the MNC,
with many affiliates both buying from and selling to each other.

Bilateral and Multilateral Netting The idea behind a payments netting system is
simple: Payments among affiliates go back and forth, whereas only a netted amount need
be transferred. Suppose, for example, the German subsidiary of an MNC sells goods
worth $1 million to its Italian affiliate that in turn sells goods worth $2 million to the
German unit. The combined flows total $3 million. On a net basis, however, the
German unit need remit only $1 million to the Italian unit. This type of bilateral netting
is valuable, however, only if subsidiaries sell back and forth to each other.
Bilateral netting would be of less use when there is a more complex structure of internal
sales, such as in the situation depicted in Exhibit 19.3A, which presents the payment
flows (converted first into a common currency, assumed here to be the dollar) that
take place among four European affiliates, located in France, Belgium, Sweden, and the
Netherlands. On a multilateral basis, however, there is greater scope for reducing cross-border
fund transfers by netting out each affiliates inflows against its outflows
Information Requirements. Essential to any netting scheme is a centralized
control point that can collect and record detailed information on the
intracorporate accounts of each participating affiliate at specified time
intervals. The control point, called a netting center, is a subsidiary company set
up in a location with minimal exchange controls for trade transactions.
Analysis. The higher the volume of intercompany transactions and the more
back-and-forth selling that takes place, the more worthwhile netting is likely
to be. A useful approach to evaluating a netting system would be to establish
the direct cost savings of the netting system and then use this figure as a
benchmark against which to measure the costs of implementation and operation.
An additional benefit from running a netting system is the tighter control that

management can exert over corporate fund flows. The same information required
to operate a netting system also will enable an MNC to shift funds in response
to expectations of currency movements, changing interest differentials, and tax
differentials.

Optimal Worldwide Cash Levels

Centralized cash management typically involves the transfer of an affiliates cash in
excess of minimal operating requirements into a centrally managed account, or cash pool.
Some firms have established a special corporate entity that collects and disburses funds
through a single bank account.
With cash pooling, each affiliate need hold locally only the minimum cash
balance required for transactions purposes. All precautionary balances are held by the parent
or in the pool. As long as the demands for cash by the various units are reasonably
independent of one another, centralized cash management can provide an equivalent degree
of protection with a lower level of cash reserves.
Evaluation and Control. Taking over control of an affiliates cash reserves can create
motivational problems for local managers unless some adjustments are made to the way in
which these managers are evaluated. One possible approach is to relieve local managers of
profit responsibility for their excess funds. The problem with this solution is that it provides
no incentive for local managers to take advantage of specific opportunities of which only they
may be aware. An alternative approach is to present local managers with interest rates for borrowing or
lending funds to the pool that reflect the opportunity cost of money to the parent corporation.
In setting these internal interest rates (IIRs), the corporate treasurer, in effect, is acting as
a bank, offering to borrow or lend currencies at given rates. By examining these IIRs, local
treasurers will be more aware of the opportunity cost of their idle cash balances, as well as
having an added incentive to act on this information. In many instances, they will prefer
to transfer at least part of their cash balances (where permitted) to a central pool in order to
earn a greater return. To make pooling work, managers must have access to the central pool
whenever they require money.
Multinational Cash Mobilization. A multinational cash mobilization system is designed to
optimize the use of funds by tracking current and near-term cash positions. The information gathered
can be used to aid a multilateral netting system, to increase the operational efficiency of a centralized cash
pool, and to determine more effective short-term borrowing and investment policies.
The operation of a multinational cash mobilization system is illustrated here with a simple
example centered on a firms four European affiliates. Assume that the European headquarters
maintains a regional cash pool in London for its operating units located in England, France,
Germany, and Italy. Each day, at the close of banking hours, every affiliate reports to London its
current cash balances in cleared fundsthat is, its cash accounts net of all receipts and
disbursements that have cleared during the day. All balances are reported in a common
currency, which is assumed here to be the U.S. dollar, with local currencies translated at rates
designated by the manager of the central pool.
Bank Relations
Good bank relations are central to a companys international cash management effort. Although some
companies may be quite pleased with their banks services, others may not even realize that they
are being poorly served by their banks. Poor cash management services mean lost interest
revenues, overpriced services, and inappropriate or redundant services. Here are some common
problems in bank relations:
l Too many relations: Many firms that have conducted a bank relations audit find that they
are dealing with too many banks. Using too many banks can be expensive. It also invariably generates

idle balances, higher compensating balances, more check-clearing float, suboptimal rates on foreign
exchange and loans, a heavier administrative workload, and diminished control over every aspect of
banking relations.
l High banking costs: To keep a lid on bank expenses, treasury management must
carefully track not only the direct costs of banking servicesincluding rates, spreads, and
commissionsbut also the indirect costs rising from check float, value-datingthat is, when
value is given for fundsand compensating balances. This monitoring is especially important in the
developing countries of Latin America and Asia. In these countries, compensating balance requirements
the fraction of an outstanding loan balance required to be held on deposit in a non-interestbearing accountmay range as high as 30% to 35%, and check-clearing times may drag on for
days or even weeks. It also pays off in European countries such as Italy, where banks enjoy valuedating periods of as long as 20 to 25 days.
l Inadequate reporting: Banks often do not provide immediate information on collections
and account balances. This delay can cause excessive amounts of idle cash and prolonged float. To
avoid such problems, firms should instruct their banks to provide daily balance information and to
distinguish clearly between ledger and collected balancesthat is, posted totals versus
immediately available funds.
l Excessive clearing delays: In many countries, bank float can rob firms of funds availability. In
nations such as Mexico, Spain, Italy, and Indonesia, checks drawn on banks located in remote
areas can take weeks to clear to headquarters accounts in the capital city. Fortunately, firms that
negotiate for better float times often meet with success. Whatever method is used to reduce clearing
time, it is crucial that companies constantly check up on their banks to ensure that funds are
credited to accounts as expected.
Negotiating better service is easier if the company is a valued customer. Demonstrating that it
is a valuable customer requires the firm to have ongoing discussions with its bankers to
determine the precise value of each type of banking activity and the value of the business it
generates for each bank. Armed with this information, the firm should make up a monthly report
that details the value of its banking business. By compiling this report, the company knows
precisely how much business it is giving to each bank it uses. With such information in hand, the firm
can negotiate better terms and better service from its banks.