INTERNATIONAL CASH MANAGEMENT

INTERNATIONAL CASH MANAGEMENT

Cash is the most liquid current asset. The term cash management includes: Determination of optimum amount of cash required in the business. Keep the cash balance at optimum level and investment of surplus in profitable manner. Prompt collection of cash from receivables(i.e. from debtors and bills receivables) and efficient disbursement of cash. Cash is one of the current assets of business. It is needed at all times to keep the business going. A business concern should always keep sufficient cash for meetings its obligations. Any shortage of cash will hamper the operations of a concern and any excess of it unproductive.

MEANING OF CASH
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.

MOTIVES OF HOLDING CASH

1) Transaction motive:A number of transactions take place in every business. Some of the transactions result in cash outflows such as payments for purchases, wages, operating expenses ,financial charges like interest, taxes , dividends etc. Similarly , some transaction result in cash inflows such as receipts from sales, receipts from sales, receipts from investments, other incomes etc. To meet the shortage of cash in situation when cash outflows exceed cash inflows, the business must have an adequate cash balance.

2) Precautionary motive: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.

3) Speculative motive: 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.

4) Compensating motive: Customer complaint, Penalty for violation of any rules, Fight cases against the company, compensation in case of any mishap etc. Banking Industry - 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 so on. 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.

Factors determining cash needs and level of cash.

Timing of cash flows:- the need for maintaining cash balances arises because cash inflows and cash outflows take place at different place at different times. If cash inflows perfectly match cash outflows, i.e. if they take place at same time, there would be no need for keeping cash balances. Cash shortage costs:- cash budgets would reveal the quantum as well as periods of cash shortages. Every shortages of cash involves a cost depending upon the quantum and duration of shortfall. Costs incurred as a result of shortfall of cash are called cash shortage costs. Cash management costs:- cash management also involves some costs such as salary, clerical expenses etc. of cash management staff. Cash need should be determined after considering this factor also.

 Cash excess costs:- if a firm keeps a cash balance in excess of its requirements, it will miss opportunities to invest it elsewhere. As a result it will lose interest which it would otherwise have earned by investing excess cash elsewhere. This factor should also be considered in determining the level of cash and therefore the level of cash should not be determined in excess. Uncertainty:- cash flows can never be predicted with complete accuracy and there is always some uncertainty in their forecast such as unexpected delay in collection from debtors. Firms must always keep some additional cash to meet these uncertainties'.

OBJECTIVES OF CASH MANAGEMENT.

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 management 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.

Advantages of adequate cash

Prevents insolvency of the business arising due to nonpayment 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.

Steps involved in international cash management

1) Assessment of the cash requirements:-the first step in international management 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 basis of expected amount of cash disbursement vis--vis expected inflow of cash during a particular period. The outflow and inflow of cash occurs mainly on account of various transactions. The firm holds cash also to meet precautionary and determined on the basis of experience and the general 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. The figures are consolidated in order to assess the cash need of the firm as a whole. It is because in a multinational enterprise. It is a cash flow of the firm as a whole that is taken into account and which needs to be managed.

2) Optimization of cash needs:-after the preparation of cash budget and the estimation the cash a requirement, the firm needs optimization of cash level at different units. It can be done in six ways: Intra-firm transfer of cash:- when a particular unit faces a shortage of cash, it gets it from cash surplus unit, may it be parent unit or any other sister subsidiary. it may raise funds form outside the firm if outside the firm if outside funds are cheaper and easier than the intra-firm flow of cash in view governmental restriction on such flows. however, the unit often prefers intra-firm transfer of cash in view of the fact that the surpluses of the other units are utilized. this is perhaps why funds are transferred from one unit to the other. the modes are:

 Transfer pricing: arbitrarily determined price normally for intra-firm transfer of goods and services which is quite different from arms-length price(the price at which a seller transacts with an unrelated buyer. normally, it is based on cost/ market price.) and which is done for the purpose of reducing overall tax and tariff burden as also for the working capital 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 in two countries Changes in the rate of Royalty., Dividend etc.

3) Accelerating inflows and delaying inflows: there are two types of delays in collection of cash. One is the mailing delay and other is the processing delay. In collection from across the border, long procedural formalities and governmental restrictions too come in the way. For accelerating inflows following methods are used:
Cable remittances (SWIFT)

Establishment of collection centers

Lock-box system

Reduction of processing delay

Pre- authorized payment system

Delaying Outflows Payment should be made 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

4) 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.

NO NETTING

BILATERAL NETTING

MULTILATERAL NETTING

5) Investment of surplus cash :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? How much of the surplus cash balance should be invested in nearcash assets? Which currency should be preferred for investment?

 Should the surplus cash balance of the entire firm centralised and only then invested? 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.

 How much of the surplus cash balance should be invested in nearcash assets? 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 and near-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, of which the following are important:
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.
Which currency should be preferred for investment? 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.

Centralized Cash Management

In centralized system of cash management collection of cash and payment of cash is made to and by Head office only instead of different-different branches of the company. In this system, to have efficient cash management there is two steps: Prompt Payment by Customer:- one way to ensure prompt payment by customers is prompt billing. What the customer has to pay, the period of payment etc. should be notified Accurately and in advance. The use of mechanical devices for billing along with the enclosure of a self-addressed return envelope will speed up payments by customers. Another and more important technique to encourage prompt payment by customers is the practice of offering trade discounts.

 EARLY CONVERSION OF PAYMENT INTO CASH:Once the customer makes the payment by writing a cheque in favour of the firm, the collection can be expedited by prompt encashment of the cheque. It will be recalled that there is lag is between the time a cheque is prepared and mailed by the customer and the time the funds, are included in the cash reservoir of the firm.

Advantages of centralized cash management Helps in maintaining minimum cash balance during the year.
Helps the companies to generate maximum possible returns by investing all cash resources optimally. Helping the companies to take complete advantage of multinational netting, so as to minimize transaction cost and currency exposure. Optimally, utilizes the various hedging strategies so as to minimize the MNCs foreign exchange exposure. Achieve maximum utilization of the transfer pricing mechanism so as to enhance the profitability and growth of the firm.

Disadvantage of centralized cash management. Local managers may loose motivation to control cash flows adequately. When the cash management and finance function are in the hand of headquarter the co-ordination between the financial disciplines and the local knowledge may more easily is frustrated. Moreover, a centralized cash system requires a highly formalized cash balance control system, thus rising regulative, administrative, and information costs. Finally, internalizing and recognizing the cash balance may disturb relationship of subsidiaries with local banks.

However, the disadvantage of centralized European cash management, however decline. Moreover, netting and pooling of cash positions gain attractiveness and trend towards centralized treasuries is already apparent.

Decentralized cash management.

This system of cash management means that the collection and payment of cash is maintained by the branches of large enterprise to complete the objectives of minimizes the cost of collection and reduction in the period of collection of cash. Under this system, overall there are two techniques used by large enterprise: Concentration banking- a concentration bank is one which the firm has major account usually a disbursement. Hence, this arrangement is referred to as concentration banking. Lock box system:-Under this arrangement, firms hire a post office box at the important collection centers. The customers are required to remit payments to collection centers or lock box. The lock banks of the firm, at the respective places are authorized to open the box and pick up the(cheques) received from the customers.

INTERNATIONAL RECEIVABLE MANAGEMENT.

Meaning of receivables:- the term receivables refers to debt owned to the firm by the customers resulting from sale of goods or services in the ordinary course of business. These are the funds blocked due to credit sales.

Receivables are also called as trade receivables, accounts receivables, book debts, sundry debtors and bills receivable etc. management of receivables is also known as management of trade credit.

Motives or purpose of Maintaining Receivables.

Sales maximisation:- The main objective of credit sales is to increase the total sales of the business. On being given the facility of credit, customers who have shortage of cash may also purchase the goods. Therefore, the prime motive for investment in receivables is sales growth. Profit maximisation:- Due to credit sales, the total sale of business increase. This in turn, results in increase in profits of the business.

Sales retention or meeting competition motive:- In business, goods are sold on credit to protect the current sales against emerging competition. If goods are not sold on credit, the customers may shift to the competitors who allow credit facility to them.

COSTS OF INVESTMENT IN RECEIVABLES

Administrative cost :- To record the credit sale and collections from customers, a separate credit department with additional staff, accounting records, stationery etc. is needed. Expenses have also to be incurred on acquiring information about the credit worthiness of the customers. Capital cost :- There is a time lag between sale of goods and its collection from customers. Meanwhile the firm has to pay for purchases, wages, salary and other expenses. Therefore, the firm needs additional funds which may be arranged either from external sources or from retained earnings. Both of these involve cost. Collection cost :- These are the expenses incurred by the firm on collection from the customers after expiry of the credit period. Such costs include blocking up of funds for an extended period, expenses on issuing reminders to the customers etc. Default cost :- Despite all the efforts by the management, the firm may not be able to recover full amount due from the customers. Such dues are known as bad debts or default cost.

Factor affecting the size of Receivables

Sizes of credit sales:- The volume of credit sales is the first factor which increase or decrease the size of receivables. The higher the part of credit sales out of total sales, figures of receivables will also be more or vice-versa. Credit policies:- A firm with conservative credit policy will have a low size of receivables while a firm with liberal credit policy will be increasing. Term of trade:- The size of receivables also depends upon the terms of trade. The period of credit allowed and rates of discount given are linked with receivables. If credit period allowed is more than receivables will be also be more.

Expansion plans:- When a concern wants to expand its activities, it will have to enter new markets. To attract customers, it give incentives in the form of credit facilities. The periods of credit can be reduced when the firm is able to get permanent customers. In the early stages of expansion more credit becomes essential and size of receivables will be more.

 Credit collection efforts:- the collection of credit should be streamlined. The customers should be sent periodical reminders if they fail to pay in time. On the other hand, if adequate attention is not paid towards credit collection then the concern can land itself in a serious financial problem. Relations with profits :- The credit policy is followed with a view to increase sales. When sales increase beyond a certain level the additional costs incurred are less than the increase in revenues. It will be beneficial to increase in the size of receivables or vice-versa.

International Receivables Management

Management of receivables is divided into two parts: Inter-firm sales :- In the case of inter-firm sales or the sales to an outside firm, a couple of decisions are involved. One is about the currency in which the transition should be denominated. While the other is about what the terms of payment should be. Currency denomination:- As regard currency denomination the exporter likes the denomination in a strong currency, while the importer likes the denomination in weak currency. In such a situation, it is the question of bargaining. However, the exporter may be ready to invoice the transaction in the weak currency even for a long period of credit if it has debt in that currency. It is because the sale proceeds can be used to retire the debt without any loss on account of exchange rate changes.

Terms of payments:- As regard the term of payment, the exporter does not provide a longer period of credit and tries to get the export proceeds as early as possible if the transaction is invoiced in a weak currency.

But sometimes, there is found deviation from this simple norm the credit term may be liberal if the exporter is able to borrow from the bank on the basis of bill receivables and not on the basis of actual inventory. Again , the term of credit may be liberal also in cases where competition in the market is tough.