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Working Capital
Management in the
MNE
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Quotation
Period
Price
Quote
Cascade
Mexico t
0
Order
Placed
t1
Accounts
Receivable
Period
Inventory
Period
Inputs
Received
t2
Order
Shipped
t3
Payment
Received
t4
t5
Cash
Outflow
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time
Cash
Intflow
Cash
Payment
for Inputs
Cash
Settlement
Received
Cash
Conversion Cycle
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Net Working Capital (NWC) is the net investment required of the firm
to support on-going sales. NWC components typically grow as the
firm buys inputs, produces product, and sells finished goods.
Cascade Mexicos Balance Sheet
Assets
Cash
Short-term debt
Inventory
Current assets
Current liabilities
Thepreviousexhibitillustratesoneofthekeymanagerial
decisionsforanysubsidiary:
ShouldA/Pbepaidoffearly,takingdiscountsofferedbysuppliers?
ThealternateformoffinancingforNWCbalancesisshorttermdebt
Inourexample,CascadeMexicosCFOmustdecidewhichisthe
lowercost(shorttermMexicanpesoborrowingsortheeffective
annualinterestcostofsupplierfinancingcostofcarry).
Clearly,thereareissuessuchasaccesstolocalcurrencydebt,or
variousintracompanyfinancingalternativesthatcomplicatethe
decision.
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A/P
A/P
Cascade USA
Balance Sheet
Intra-firm:
30 days
A/R
Inventory
A/P
30 days
Local-sourcing: 60 days
Mexican Business Practices
Managementofaccountsreceivableformindependent
customersrequirestwotypesofdecisions:
Whatcurrencyshouldthetransactionbedenominated?
Whatshouldbethetermsofpayment?
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Efficientcashmanagementaimstoreducecash
tiedupunnecessarilyinthesystem,without
diminishingprofitorincreasingrisk,soasto
increasetherateofreturnoninvestedassets.
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Wiretransfers(exhibit22.5)
Cashpooling
Paymentnetting(exhibit22.7)
Electronicfundtransfers
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1400
1200
1000
800
600
400
200
0
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
2000
2219
Quad
United Kingdom
Quad de
France
$3,000
$3,000
$5,000
$5,000
$5,000
$6,000
$4,000
$3,000
$2,000
Quad
Belgium
$2,000
$1,000
Deutscheland
Quad
Prior to netting, the four sister affiliates of Quad Corporation have numerous
intra-firm payments between them. Each payment results in transfer charges.
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Allfirmsneedtofinanceworkingcapital.
Thenormalsourcesoffundsforfinancingshorttermworking
capitalareaccountspayabletosuppliersandloansagainstbank
creditlines.
Insomecountries,suchastheUnitedStates,borrowingisdone
bythefirmissuingnotespayabletobanksandothercreditors.
Inmanyothercountries,shorttermborrowingisdoneonan
overdraftbasis.
Inallcases,permanentworkingcapitalrequirements,asopposed
toseasonalneeds,areatleastpartiallyfinancedwithlongterm
debtandequity.
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Pays $1,000
Quad
Belgium
Quad de
France
Pays $3,000
Pays $1,000
Deutscheland
Quad
After netting, the four sister subsidiaries of Quad Corporation have only three
net payments to make among themselves to settle all intra-firm obligations
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Cascades
In-House
Bank
Cascade Europe
Cascade Mexico
Cash flow
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