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INTERNATIONAL FINANCIAL MANAGEMENT

Updated on July 7, 2013

International Financial Management

Financial management is a broad term that covers all business decisions regarding cash flows. These cash flows extend from the funding of the entire enterprise to the preservation of firm liquidity given the gaps in time between when products are produced, sold and shipped to when payment is received. International financial management is the extension of this same set of concerns to the cross border activities of the enterprise.

Overview Of International Financial Management

International financial management is not separate set of issues from domestic or traditional financial management, but the additional levels of risk and complexity introduced by the conduct methods, different markets. different interest rates and most of all different currencies.

The many dimensions of international financial management are most easily explained in the context of a firm's financial decision making process of evaluating a potential foreign investment.

» Working capital and cash flow management the management of operating and financial cash flows passing in and out of a specific investment project.

» Capital structure-the determination of the relative quantities of debts capital and equity capital that will constitute the funding of the investment.

» Raising on-term capital-the acquisition of equity or debt for the investment. This requires the selection of the exact form of capital its maturity its reward or repayment structure its currency of denomination, and its source.

International financial management means that all the above financial activities will be complicated by the differences in markets, laws and especially currencies.This is the field of financial risk management. Firms may international borrow foreign currencies, buy forward contracts, or price their products in different currencies in order to mange their cash flows which are denominated in foreign currencies.

Change in interest and exchange rates will affect each of the above steps in the international investment process. All firms no matter how domestic they may seem in structure are influenced by exchange rate changes. The financial management of a firm that has any dimension of international activity, imports or exports, foreign subsidiaries or affiliates, must pay special attention to these issues if the firm to succeed in its international endeavors.

Operating And Financial Cash Flows

A fundamental objective of financial management, domestic or international, is the management and maximization of cash flows; that is the amount of cash that the company has. To the extent that the company can maximize its cash position by internal means, it reduces the need to go outside the company for external funds.

International Working Capital And Cash Flow Management

Working capital management is the financing of short-term or current assets, but the term is used here to describe all short term financing and financial management of the firm. Even a small multinational firm will have a number of different cash flows moving throughout its system at one time. The maintenance of proper liquidity the monitoring of payments and the acquisition of additional capital when needed require a tiring of payments, and the acquisition of additional capital when needed require a great degree of organization and planning in international operations.

Firms have both operating cash flows and financial cash flows. Operating cash flows arise from the everyday business activities of the firm such as pausing for materials or resources or receiving payments for items sold . In addition to the direct cost and revenue cash flows from operations there are a number of indirect cash flows. These indirect cash flows are primarily license fees paid to the owners of particular technologic processes and royalties to the holders of patents or copyrights. Many multinational firms also spread their overhead and management expenses incurred at the parent over their foreign affiliates and subsidiaries that are utilizing the parent's administrative services.

Financial cash flows arise from the funding activities of the firm. The servicing of funding sources interest on debt, and dividend payments to shareholders constitute potentially large and frequent cash flows. Periodic additions to debt or equity through new bank loans new bond issuances or supplemental stock sales may constitute additional financial cash flows in the international firm.

Cash Flow Management

The structure of the firm dictates the ways cash flows and financial resources can be managed. The trend in the past decade has been for the increasing centralization of most financial and treasury operations. The centralized treasury is often responsible for both funding operations and cash flow management. The centralized treasury may often enjoy significant economies of scale, offering more services and expertise to the various units of the worldwide than the individual units themselves could support. However regardless of whether the firm follows a centralized or decent national firm in managing its cash flows.

Managing The Payment Of Receivables And Their Conversion Into Cash

When a company chooses to do business in a foreign country or region through a wholly owned subsidiary or some form of cooperative venture, the need to secure payment through export letters of credit is eliminated. In its place the more traditional method of payment becomes operable. In attempting to design a system that will speed up the conversion of accounts receivable into cash the following items will require analysis for each country in which the company does business.

» The bank's or financial institution used by each customer for effecting payment.

» The method of payment used by customers; unlike the United States where checks are the usual method of payment a variety of other methods are in use in foreign countries.

» Banking regulations and clearing practices and times

» Mail delivery times

» Value-dating practices, that is when the bank actually recognizes the availability of fund.

Assuming the analyses just mentioned have been performed, the following basic techniques might be used to expedite the receipt of payments in order to convert those payments into cash.

Electronic Transfers.

Cable remittance is the transfer of funds from one bank to another bank using communication systems owned by others, for example telex or telegram. Funds can be transferred globally, commonly with next-day delivery.

Wire transfer is the bank to bank transfer of funds using the SWIFT system is owned and operated by approximately 900 banks in the United States, Europe, and the far East. SWIFT is less costly and more efficient than cable remittance.

Mobilization Centers

Customers can be instructed to mail their payment to the seller's regional office, which would then consolidate funds and expedite transfer to the home office or an appropriate subsidiary. Payments may also be deposited directly into the seller's account at a branch of the bank working with the mobilization center.

Lock Boxes

The lock box is a technique with wide domestic and international use, Customers mail payments to a lock box a post office box to which the seller's bank is given access. The bank removes and deposits checks frequently. If analyses indicates that a large number of customers in a given area are using branches of the same bank, consideration should be given to establishing a lock box account in the customer's bank. This may result in the same day clearing offends.

Techniques To Minimize The Need For Cash Or Cash Outflows

Cash Pooling

A large firm with a number of units operating within an individual country and across countries may be able to economize on the amount of firm assets needed in cash if the cash holding is operated through one central Pool. With one pool of capital and up to date information on the cash on the cash flows in and out of the various units the firm spends much less in terms of lost interest on cash that are held in safe keeping against unforeseen cash flow shortfalls. A single large pool may also be able to negotiate better financial service rates with banking institutions for clearing purposes.

Netting.

Many of the cash flows between units of a multinational firm are two way and may result in unneeded transfer costs and transaction expenses. Coordination between units simply requires some planning and budgeting of interfere cash flows in order that two way flows are netted against one another with one smaller cash flow replacing two opposed flows. This is particularly helpful if the two way flow is in two different currencies as each would be suffering currency exchange charges for interim transfers.

Leads And Lags

The timing of payments between units of a multinational is somewhat flexible. This flexibility allows the firm to not only position cash flows where they are needed most, but may actually aid in currency risk management. A foreign subsidiary that is expecting its local currency to fall in value relatives to U.S. dollar may try to speed up or lead its payments to the parent. Similarly if the local currency is expected to rise versus the dollar the subsidiary may want to wait, or lag payments until exchange rates are more favorable.

Rein voicing

Multinational firms with a variety of manufacturing and distribution subsidiaries scattered over a number of countries within a region may often find it more economical to have one office or subsidiary taking ownership of all and sells to a second unit. therefore taking ownership of the goods and rein voicing the sale to the next unit. Once ownership is taken the transaction can be redenominated in a different currency, netted against other payments hedged against specific currency exposures or reprised in accordance with potential tax benefits of the rein voicing center host country. The additional flexibility achievable in cash flow management product pricing and profit placement may be substantial.

Internal Banks

Some multinational firms have found that their financial resources and needs are becoming either too large or too sophisticated for the financial services that are available in many of their local subsidiary markets. On solution to this has been the establishment of an internal bank within the firm. This bank actually buys and sells payables and receivables from the various units. This free the units of the firm from struggling for continual working capital financing and allows them to focus on their primary business activities.

These structures and procedures are often combined in different ways to fit the needs of the individual multinational firm. Some techniques are encouraged or prohibited by laws and regulations, depending on the host country government and stage of capital market liberalization. In fact it is not uncommon to find one system at work in one hemisphere of firm operations with a different system in use in the other hemisphere. Multinational cash flow management requires flexible thinking on the part of managers.

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