Multinational Working Capital Management
A multinational corporation can be defined as an entity, which has branches, or subsidiaries spread over many countries. Since multinational corporations have operations in different countries, the financial transactions will also be denominated in multiple currencies. Hence, financial management of short-term assets and liabilities in an MNC is much more important and complex in nature. It involves management of current assets and current liabilities denominated in different currencies.
INTERNATIONAL CASH MANAGEMENT
International money managers attempt to attain on a worldwide basis the traditional domestic objectives of cash management: (1) bringing the company's cash resources within control as quickly and efficiently as possible and (2) achieving the optimum conservation and utilization of these funds. Accomplishing the first goal requires establishing accurate, timely forecasting and reporting systems, improving cash collections and disbursements, and decreasing the cost of moving funds among affiliates. The second objective is achieved by minimizing the required level of cash balances, making money available when and where it is needed, and increasing the risk-adjusted return on those funds that can be invested.
The principles of domestic and international cash management are identical. The latter is a more complicated exercise, however, and not only because of its wider scope and the need to recognize the customs and practices of other countries. When considering the movement of funds across national borders, a number of external factors inhibit adjustment and constrain the money manager. The most obvious is a set of restrictions that impedes the free flow of money into or out of a country. These regulations impede the free flow of capital and, thereby, hinder an international cash management program.
There is really only one generalization that can be made about this type of regulation: Controls become more stringent during periods of crisis, precisely when financial managers want to act. Thus, a large premium is placed on foresight, planning, and anticipation. Government restrictions must be scrutinized on a country-by-country basis to determine realistic options and limits of action.
Other complicating factors in international money management include multiple tax jurisdictions and currencies and the relative absence of internationally integrated interchange facilities—such as are available domestically in the United States and in other Western nations—for moving cash swiftly from one location to another. Despite these difficulties, however, MNCs may have significant opportunities for improving their global cash management. For example, multinationals can often achieve higher returns overseas on short-term investments that are denied to purely domestic corporations, and the MNCs can frequently keep a higher proportion of these returns after tax by taking advantage of various tax laws and treaties. In addition, by considering all corporate funds as belonging to a central reservoir or "pool" and managing it as such (where permitted by the exchange control authorities), overall returns can be increased while simultaneously reducing the required level of cash and marketable securities worldwide.
Multinational corporations, by virtue of their presence in different countries, have access to much wider international money markets. Hence, there is a need for the finance manager to develop a strategy to meet the actual requirement of the MNC which proposes either to mobilize the funds or to deploy the surplus cash in investments. The objective of cash management is (i) to maximize the return by proper allocation of short-term investments and (ii) to minimize the cost of borrowing by borrowing in different money markets.
To achieve the above objective the MNCs have to evolve a strategy by taking the following aspects into consideration:
i. The borrowing cost in a particular currency and the relationship between nominal interest rate between the currencies and anticipated exchange rates of the currencies (International Fisher effect).
ii. The exchange risk of the MNC consequent to the firm’s exposure in different currencies with regard to the receivables and payables.
iii. The level of risk acceptable to the management of the MNC.
iv. The availability of tools for hedging.
v. Tax structure prevailing in various countries
vi. Political environment and the consequent risk relating to various countries.
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