International Working Capital

Management
 Meaning
It is the process of planning and controlling the
level and mix of current assets of the firm as
well as financing of these assets.
Both MNCs and domestic firms are essentially
concerned with selecting that combination of
inventory, accounts receivable and cash that
will maximize the value of the firm.
Basic difference between domestic and
international working capital management is
the impact of currency fluctuations, differing
rate of inflation, potential exchange controls
and multiple tax jurisdiction on these
decisions.
 International Cash Management
Cross-border movements of funds, from and to
other companies as well as within the
company.
It is related to two things:
the movement of money and
the movement of information relating to the
movement of money
 Objectives of an Effective International Cash
Management System
• Minimize the currency exposure risk
• Minimize the country and political risk
• Minimize the overall cash requirements of the
company as a whole without disturbing the
smooth operations of the subsidiary or its
affiliate.
• Minimize the transactions costs.
• Full benefits of economies of scale as well as the
benefit of superior knowledge.
Techniques to optimize Cash Flow (Generate
Working Capital)
• Accelerating cash inflows
• Managing blocked funds
• Leading and lagging strategy
• Using netting to reduce overall transaction
costs by eliminating a number of unnecessary
conversations and transfer of currencies
• Minimising the tax on cash flow through
international transfer pricing
• Centralized Cash Management: the cash
management of the entire MNC is vested in a
centralized cash depository, which may be a
special corporate entity. It acts as a netting
centre as well as the depository of all surplus
funds of a subsidiary unit.
• Decentralized Cash Management: when the
cash management is left to the affiliates, each
subsidiary has to take on the entire
responsibility of cash management, including
short-term investment.
 Receivables Management
They are also known as accounts receivables, trade
receivables or customer receivables.
But the major costs that are associated with credit sales.
• The cost for the use of the funds to carry accounts
receivables (financing costs)
• Administrative expenses (costs for credit investigation
and supervision).
• Credit collection costs
• Bad-debt losses.
Factoring: It is another way to minimize
accounts receivables risks from changes in
exchange rates between the sale date and the
collection date.
Multinational accounts receivables are created
by two separate types of transaction:
Sales to outside the corporate group and
Intra-company sales
 Inventory Management
Firms hold inventory for different purposes,
which may be broadly categorized as
transaction, precautionary and speculative
purposes. A firm may hold inventory to meet
its day to day business requirements.
While deciding on the level of inventory, the
management of the firm should consider the
costs of holding inventory as well as the
benefits derived from it.
Inventory is broadly classified as raw materials,
work-in-process, supplies and finished goods.
Supplies inventory which includes office
materials, plant maintenance materials and
those items that do not directly enter
production, but are necessary for production
and maintenance.
 Economic Order Quantity
It is used to determine the optimal level of inventory. The total
costs of inventory broadly consists of order costs and
carrying costs.
The order costs increase with the number of orders placed.
The higher the frequency of orders placed for the inventory,
the higher the order costs.
A high order quantity leads to higher carrying costs but lower
order costs
A low order quantity leads to lower carrying costs but higher
order costs.
EOQ model balances order costs against carrying costs.
Management of Cash and near cash assets

It includes four steps:

1. Assessment of cash requirement
2. Optimization of cash needs through
restructuring of cash flows
3. Selection of the source of funds
4. Investment of surplus cash into near cash
assets.
If investment of cash surplus is done then, the
effective rate of return can be expressed as
r = (1+if) (1+ef) – 1
Where,
if = interest rate on foreign currency investment
ef = changes in the exchange rate
Problem:
If an US company invests its cash in the Canadian market
where the interest rate is 6% as compared to the
interest rate of 4% in the US. If the Canadian dollar
depreciates during the period by say 5%, the effective
return will be:
r = (1+0.06) (1+(-0.05) – 1
= 0.7%
Which is very less return, hence US company will not
invest in Canadian market.