{"id":188,"date":"2015-07-30T01:25:26","date_gmt":"2015-07-30T01:25:26","guid":{"rendered":"https:\/\/courses.candelalearning.com\/intlbusx1xmaster\/?post_type=chapter&p=188"},"modified":"2017-01-09T19:09:30","modified_gmt":"2017-01-09T19:09:30","slug":"global-money-management-moving-money-across-borders","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/cerritos-internationalbusiness\/chapter\/global-money-management-moving-money-across-borders\/","title":{"raw":"Reading: Global Money Management: Moving Money across Borders","rendered":"Reading: Global Money Management: Moving Money across Borders"},"content":{"raw":"
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Learning Objectives<\/h3>\r\n
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  1. Understand the role of global money management in a multinational firm.<\/li>\r\n\t
  2. Know how multilateral netting and transfer pricing can be used to minimize transaction costs and taxes for the firm.<\/li>\r\n\t
  3. Appreciate the efficiencies and savings that result from centralized depositories.<\/li>\r\n<\/ol>\r\n<\/div>\r\n
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    Global Money Management and Centralized Depositories<\/h2>\r\nGlobal money management involves moving money across borders and managing the firm\u2019s financial resources in a way that minimizes taxes and transaction fees while maximizing the firm\u2019s returns.\r\n\r\nA multinational company can make the most of its cash reserves by holding cash balances at a central location, called a centralized depository<\/span><\/span>. There are two main advantages of centralized depositories:\r\n
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    1. The company earns a higher interest on higher amounts of cash, because cash from across the company is pooled.<\/li>\r\n\t
    2. Pooling cash reserves reduces the total amount of cash that the company needs to hold, because the amount of cash held on hand as a precautionary measure against the unexpected can be pooled and thus reduced\u2014it\u2019s unlikely that all the worst cases will happen simultaneously.<\/li>\r\n<\/ol>\r\nCentralized money management also lets a company trade currencies between its subsidiaries and thereby eliminate intermediaries like banks. This practice saves the firm transaction costs. Centralization also means that the company can buy currencies in larger lot sizes, which gives it a better price.\r\n\r\nTwo facts are important to keep in mind when using the centralized depository technique for global cash management. First, a government can restrict how much capital can flow out of the country (governments do this to preserve foreign exchange reserves). Second, there are transaction costs associated with moving money across borders, and these costs are incurred each time the money is moved.\r\n\r\n<\/div>\r\n
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      Cash Management<\/h2>\r\nCompanies need to be aware of differences in local cash practices. For example, business customers in Asia often pay their invoices via bank draft\u2014a common method there, but almost unheard of in the United States. This approach typically means a company gets its cash slowly, creating potential working-capital problems. \u201cIf you sell to a customer on 30-day terms and on day 29 they give you a bank draft, that\u2019s three months more you\u2019ll have to wait,\u201d said Brian Kenny, CFO of specialty chemicals materials company W. R. Grace\u2019s Asia-Pacific division.[footnote]Don Durfee, \u201cLocal Knowledge,\u201d CFO<\/em>, November 1, 2008, accessed August 12, 2010, http:\/\/www.cfo.com\/printable\/article.cfm\/12465219<\/a>.[\/footnote]<\/span>\r\n
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      Multilateral Netting<\/h2>\r\nMultilateral netting<\/span><\/span> is a technique which companies use to reduce the costs of cross-border payments between subsidiaries. Three or more subsidiaries must participate. (If only two participate, the technique is known as bilateral netting.)\r\n\r\nFor example, let\u2019s say a firm\u2019s subsidiary in the Czech Republic owes the Australian subsidiary $4 million, while the Australian subsidiary owes the Czech subsidiary $10 million. Rather than the Czech subsidiary transferring $4 million and the Australian transferring $10 million, the parties agree to one payment in which the Australian subsidiary pays the Czech $6 million. Both payments are thus satisfied. The total funds that flowed between the subsidiaries are reduced from $14 million to $6 million, reducing costs. For example, if the transaction costs (i.e., the foreign exchange commission plus the transfer fees) are 1 percent of the total funds transferred, the transaction costs in this example drop from $140,000 to $60,000. In cases where multiple subsidiaries trade amongst each other, the savings are even more significant. For example, if four subsidiaries each trade with three other subsidiaries, the total number of transactions can be reduced from twelve to three, which reduces transaction costs substantially.\r\n\r\nIn a real-life example, Colgate-Palmolive operates in 218 countries. Much of its manufacturing operations are centralized rather than being located in numerous countries around the world. As a result, subsidiaries do a lot of business with each other. Colgate headquarters requires that all subsidiaries submit and settle their payments to each other on the same day. By directing all settlements to one day, Colgate maximizes the benefits of multilateral netting and saves on the spread. This reduces the transaction costs as well as the risk of currency fluctuations.[footnote]Kabir Masson, \u201c\u2018Managing International Financial Risk\u2019: A Presentation by Hans L. Pohlschroeder,\u201d Columbia Business School Chazen Web Journal of International Business<\/em>, February 24, 2009, accessed November 23, 2010, http:\/\/www1.gsb.columbia.edu\/mygsb\/faculty\/research\/pubfiles\/3386\/Managing%20International%20Financial%20Risk%2Epdf<\/a>.[\/footnote]<\/span>\r\n
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      Did You Know?<\/h3>\r\nAccording to a survey of almost five hundred CFOs and controllers from US-based companies, the following are the top concerns regarding international taxes:\r\n