MNCs tie up funds when investing in their working capital, which includes short term assets such as inventory, accounts receivable, and cash. They attempt working capital management by maintaining sufficient short-term assets to support their operations. Yet, they do not want to invest excessively in short-term assets because these funds might be put to better use. The management of working capital is more complex for MNCs that have foreign subsidiaries because each subsidiary must have adequate working capital to support its operations. If a subsidiary experiences a deficiency in inventory, its production may be delayed. If it is short of cash, it may be unable to purchase supplies or materials. If the parent of an MNC is aware of the working capital situation at every subsidiary, it may be able to transfer working capital from one subsidiary to another in order to solve temporary deficiencies at any subsidiary.
Begin with outflow payments by the subsidiary to purchase raw materials or supplies. The subsidiary will normally have a more difficult time forecasting future outflow payments if its purchases are international rather than domestic because of exchange rate fluctuations. In addition, there is a possibility that payments will be substantially higher due to appreciation of the invoice currency. Consequently, the firm may wish to maintain a large inventory of supplies and raw materials so that it can draw from its inventory and cut down on purchases if the invoice currency appreciates. Still another possibility is that imported goods from another country could be restricted by the 21: International Cash Management
The term cash management can be broadly defined to mean optimization of cash flows and investment of excess cash. From an international perspective, cash management is very complex because laws pertaining to cross-border cash transfers differ among countries. In addition, exchange rate fluctuations can affect the value of cross-border cash transfers. Financial managers need to understand the advantages and disadvantages of investing cash in foreign markets so that they can make international cash management decisions that maximize the value of the MNC.
The specific objectives of this chapter are to:
■ explain the difference in analyzing cash flows from a subsidiary perspective ■ explain the various techniques used to optimize cash flows, ■ explain common complications in optimizing cash flows, and ■ explain the potential benefits and risks from foreign investing.
In this event, a larger inventory would give a firm more time to search for alternative sources of supplies or raw materials. A subsidiary with domestic supply sources would not experience such a problem and therefore would not need such a large inventory.
Outflow payments for supplies will be influenced by future sales. If the sales volume is substantially influenced by exchange rate fluctuations, its future level becomes more uncertain, which makes its need for supplies more uncertain. Such uncertainty may force the subsidiary to maintain larger cash balances to cover any unexpected increase in supply requirements.
Subsidiary Revenue :-
If subsidiaries export their products, their sales volume may be more volatile than if the goods were only sold domestically. This volatility could be due to the fluctuating exchange rate of the invoice currency. Importers’ demand for these finished goods will most likely decrease if the invoice currency appreciates. The sales volume of exports is also susceptible to business cycles of the importing countries. If the goods were sold domestically, the exchange rate fluctuations would not have a direct impact on sales, although they would still have an indirect impact since the fluctuations would influence prices paid by local customers for imports from foreign competitors. Sales can often be increased when credit standards...