International Issues

Chapter 16
Cash Management

The goals of cash management in a multinational company (MNC) parallel the cash management goals of purely domestic corporations. That is, MNCs attempt to speed up collections, slow disbursements, and make the most efficient use of the firm’s cash resources by minimizing excess balances and investing balances to earn the highest possible return, consistent with liquidity and safety constraints. However, there are some unique elements of cash management for an MNC.

First, cash management is complicated by difficulties and costs associated with moving funds from one country (and currency) to another. It is costly to convert cash from one currency to another. Second, there is a general lack of integrated international cash transfer facilities, such as exist in Canada and most other Western nations. The absence of this capability makes it difficult to move funds quickly from one country to another. Third, investment opportunities for temporary excess cash balances are much broader for an MNC than for a domestic firm. MNCs must consider short-term investment options in many different countries—a process further complicated by exchange rate risk. Fourth, the host government may place restrictions on the movement of cash out of the country.

Practicing MNC cash managers have developed a number of techniques designed to optimize the process of international cash management in the face of these difficulties. First, there is general agreement that the cash management function for an MNC should be centralized with respect to the information-gathering and decision-making process. The parent normally maintains an international cash manager who has the expertise and responsibility to keep track of the firm’s cash balances around the world and to identify the best sources for short-term borrowing and lending.

Second, many MNCs have instituted a process called multilateral netting. Multilateral netting is designed to minimize the cost associated with misdirected funds. Misdirected funds are funds that cross an international border unnecessarily. It is costly to convert funds from one currency to another. Hence it is desirable to minimize unnecessary transactions. The greater the number of subsidiaries an MNC has, the more complex is the process of managing a multilateral netting system. At the same time, the potential cost savings are greatly increased.

[Multilateral Netting
A process of international cash management designed to minimize the cost associated with misdirected funds.]

[Misdirected Funds
Funds that cross an international border unintentionally.]

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