UNIT III

International Working Capital

Management
Working Capital
 Investment in Current Assets

 Current Assets, those assets which can be

converted into cash within an a/c’ing yr.

 Like,
 Cash, Near Cash,
 Debtors, Bills Receivables
 Investory
Current Assets
(Circulating Assets)

Cash

Debtors Raw
Material

Finished
Goods
Working Capital

 Gross Working Capital

 Total of Current Assets

 Net Working Capital

 Current Assets – Current Liablities
International Working Capital
Management

 Involvement of Many currencies

 Large transit time

 Large option of financing and investing

International Working Capital
Management

 International Cash Management

 International Receivable Management

 International Inventory Management

International Working Capital
Management

International Cash Management

International Cash Management
 Types of International Cash Flows

 From Parent to Subsidiary

 Initial Capital, Supplement

 From Subsidiary to Parent

 Dividend and Royalty

 Among Different Subsidiaries

 Exports and Imports
International Cash Management
 Steps in Cash Management

1. Assessment of the Cash Requirement

2. Optimization of Cash Needs

3. Selection of Sources from where cash could be

brought in

4. Investment of Surplus Cash

International Cash Management

1. Assessment of Cash Requirement

 Cash Budget of Each Subsidiary

 Consolidated Cash Budget

 One Subsidiary may be in surplus and other in deficit

 Can reduce the overall cash requirement

International Cash Management

2. Optimization of Cash Needs

 Accelerating Inflows of cash

 Mailing Delay, Processing Delay

 Delaying Outflows of Cash

 Netting of Payments

 Centralized Management of Precautionary Cash

balance
International Cash Management

3. Selection of Sources of Funds

 MNCs has wider option as sources of finance

 Funds from Cash Surplus Units (Other Subsidiaries)

 Borrowing from International Money Market

 Borrowing from the host-country

International Cash Management

3. Selection of Sources of Funds

 Selection depends on Cost of Funds

 Cost of Internal Funds & External Funds

 Opportunity Cost of Internal Funds
 Interest on External Funds

 Costof International Money Market & Host

Country Funds
 Interest Rate
 Exchange Rate
 Tax Rates
International Cash Management

4. Investment of Surplus
 Keeping idle cash provides LIQUIDITY

 But it has a COST, as idle cash is not earning

 Therefore,
requirement is to invest CASH into NEAR
CASH SECURITIES

 Which provides LIQUIDITY as well as RETURN

International Cash Management

4. Investment of Surplus
 While investing surplus cash, following

points should be focused:

 Centralized Investment

 How Much and Where to be invested

 Currency of Investment
International Cash Management

4. Investment of Surplus
 Centralized Investment

 Investment can be centralized of decentralized

 Centralized Investment is always preferred

 Different thinking and situation in different host countries
 Some having deficit may borrow at high rate
 Economies of Scale
 Can be invested in large avenues
International Cash Management

4. Investment of Surplus
 How Much and Where to Invest
 Larger the Investment
 Greater the Interest (Return)
 Greater the Risk of Liquidity
 Therefore, a trade-off should be maintained

 While making investment, Portfolio should be:

 Diversified
 Reviewed Frequently
 Investment in Liquid Assets
 Maturities should match the needs
International Cash Management

4. Investment of Surplus
 Currency of Investment
 Normally, investment is made at higher Interest
Location

 Buteffective yield (return) should be seen, which

depends on
 Rate of Interest
 Exchange Rates

 Ifcurrency of country of investment depreciates, the

return will be lower
International Working Capital
Management

International Receivable Management

International Receivable Management

 Credit Sales leads to “Account Receivables”

 Benefits of Receivables
 Higher Sales, thus, Higher Profits

 Costs of Receivables:
 Financing Cost
 Administrative Cost
 Collection Cost
 Bad Debt Cost
 Foreign Exchange Cost
International Receivable Management

 Management of Receivables focuses on two

important facts:

 Costof Credit Sales should not exceed the benefits

from credit sales
Marginal Cost < Marginal Profits

 Intra-Firms Sales and Inter-Firm Sales should be

differentiated
International Receivable Management
How to Manage
 Intra-Firm Receivables:
 Quantum of Credit and
 Time Period of Credit does not matter
 A unit may delay payment if having deficit
 May pay in advance if in surplus
 Leads and Lags does not matter

 But if paying firm is in weak currency

country, it should make payment as early
as possible.
International Receivable Management
How to Manage
 Inter-Firm Receivables:
 Currency Denomination
 Should prefer to denominate the payment in strong
currency
 May accept in weak currency, if it have to retire some
debt in such currency

 Terms of Payment
 Ifpayment is denominated in Weak Currency, credit
should be for very short period
International Working Capital
Management

International Inventory Management

International Inventory Management

 Inventory – Biggest share of current assets

 At the same time least liquid assets
 Therefore, its management deserves sufficient
care
 To some Inventory Management in International
context is similar to domestic inventory
management.
International Inventory Management

 Some additional factors are:

 Simultaneous Inventory in different countries

 Transit Time is quite longer

 Customs procedures are quite lengthy

 Political risk along with exchange rate risk is there.

 Based on these problem there are some

deviations from simple norms…
International Inventory Management

 Deviations from Economic Order Quantity (EOQ):

 You all knows about EOQ

 International
firms possess normally bigger stock than
EOQ – ‘STOCKPILING’, because of
 Exchange Rate Risk
 Political Risk
 High Transit Time etc.

 Therefore,EOQ is find out and some extra quantity is

added for above factors, looking at the net benefit
International Inventory Management

 Shifting of Re-order Point:

 You know the Re-Order Level well

A point where order should be placed keeping ‘Safety

Stock’ in mind

 Safety stock is – Stock for Lead Time

 Lead Time in case of International Trade is very high

 Therefore, Re-Order Level is calculated

accordingly.