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Ib Group 4

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Hooria Hamid BE 17 01

Introduction

 Any firm with affiliates in at least


two countries (even with a simple
sales office abroad) needs to
deal with differences in the
financial environments of those
countries—differences in their tax
systems, their currency systems,
and numerous other areas.
 Ford and General Electric
 Basic financial
management can be
divided into two broad
headings:
 (1) choice and
management of sources
of funds and
 (2) choice and
management of uses of
funds
DETERMINING PARENT–
SUBSIDIARY RELATIONSHIPS
In adressing the challenge,
MNEs tend to opt for one ofthree
managerial solutions:
 Polycentric
 Ethnocentric
 Geocentric
Polycentric solution
 A polycentric solution is to treat the
MNE as a holding company and to
decentralize decision making to the
subsidiary levels.
Advantages:
 Flexible, motivated, efficient, and
competitive.
 reduces the authority of the home
office, andsenior corporate
management often dislike this dilution
of their authority.
Ethnocentric solution

The ethnocentric solution is to treat all foreign


operations as if they were extensions of domestic
operations. In this case each unit is integrated into
the planning and control systemof the parent
company.

Advantages
 Coordinate overall operations carefully
 Greater control
Geocentric solution
 The geocentric solution is to handle financial
planning and controlling decisions on a global basis.
These decisions are typically influenced by two
factors. )One is the nature and location of the
subsidiary.
For example,
 British investment in North America has
predominantly been via holding companies,
polycentricapproach, since the quality of local
management largely rewards decentralization.
 When an MNE’s overseas units face a myriad of tax
rates, financial systems, and competitive
environments, it is often more efficient to centralize
most of the financial control decisions because this is
the best way to ensure that profit and efficiency are
maximized.
MANAGING
GLOBAL CASH
FLOWS

SAIFULLAH MALIK
BE-17-24
Today's
Discussion
Outline of Topics

01 Internal Funds Flow

02 Funds Positioning Techniques

03 Multilateral Netting
Internal Funds
Flows
A Brief Introduction

The fund flow highlights the movement of cash only—


that is, it reflects the net movement after examining
inflows and outflows of monetary funds. It will also
identify any activity that might be out of character for
the company, such as an irregular expense.
Funds Flow Cash Flow
The statement of funds flows The statement of cash flows
highlights the movement of cash refers to the change in a
only. company's cash and equivalents
from one period to the next.
The Methods of
Raising Money
Internally
Getting from internal sources i.e
working capital
Parent company increasing its
equity capital investment in the
subsidiary
Borrowing from a local bank or
parent company
Funds Positioning
Technique

Strategies that are used to move money


from one multinational operation to
another. Such mechanisms include
transfer pricing, intercompany loans,
timing of payments etc.
Types of
Funds Positioning
Transfer Tax Fronting
Pricing Heavens Loans
An internal price Jurisdictions that A third-party loan in
that is set by offers the MNE a which an MNE home
company in intrafirm lower tax rate than office deposits funds
trade in other places with a financial
institution
Multilateral
Netting

Payment of net amounts due only


between affiliates of a MNE that
have multiple transactions among
the group, which can be partially
netted out among them; so only the
net funds need to be transferred.
Other Related
Concepts
Arm's Length Price Clearing Account
The price that exists or would A centralized cash management
exist on a sale of a given bank account in which one MNE
product or service between two affiliate reviews payment needs
unrelated companies. among various MNE affiliates
and arranges to make
Hedge payments of net funds due from
each affiliate to others through
A strategy to protect hte firm
the clearing account.
against risk, in ths case against
each exchange rate risk.
Potential Gains to
MNE
FROM CENTRALISED CASH
MANAGEMENT

By pooling the cash By centralizing cash By reducing the


holdings of affiliates management, it can amount of cash in
where possible, the have one group of any one affiliate, it
MNE can hold a people specialize in can reduce country
smaller total the performance of risks as well as
amount of cash, this task, thus financial costs.
thus reducing its achieving better
financing needs. decisions and
economies of scale.
CONTINUED
As noted previously, it can net out Its central cash management
intracompany accounts when there group can ensure that cash
are multiple payables and management decisions aim at
receivables among affiliates, thus corporate goals rather than the
reducing the amount of money goals of individual affiliates
actually transferred among when these might conflict.
affiliates.
International Financing
Kiran Yousuf BE-17-38
International Sources of Credit
BE 17 09
1.Objective Waniya Aman
Identification

2.Performance Evaluation

3.Consistent performance with goals

Control

Desired results(budgeted)
Actual Results
Control: The Process
• Financial reporting to home office
• Capital Budget Allocation to Affiliates
• Result evaluation
• Deviations
• Management Planning
• Dealing with deviation planning again
• A cyclic process
Home Office Control
More resource at home C
O
N
Capital Projects Allocation
T
R
O
L
Criteria for control process
Personal ties Local currency vs Home
currency

1. Affiliates 2.Affiliates 3. Affiliates


Overseas Operations
S F
T I
R
A
Diversification reducing exchange risks by N
A
T incorporating different currencies into several N
E C
G currencies I
I A
C LG Group L

C High labor cost market acceptance G


H O
O Interest risks abroad A
I L
C
E
Low cost competition S

joined hands with Gepi Germeny and Iberna Itlay for market
share expansion
Alliances
• Joining hands for
• Research and Development Expenses
• Manufacturing and Selling Expense
• GM and Isuz producing electric vehicles and
fuel cells
• Citigroup, Microsoft-Sony Alliance and more refer to
text in book Page 432, 3rd paragraph
Cost cutting A relative Strategy
• Reduce expenses and improve profitability
• May re negotiate the labor contracts
• Investment into new plant
• Cost cutting for existing operations
• Cost cutting through merging departments
Refer to text Politics in Reorganization Page 201,
David L Goetsch Stanely B Davis Quality
Management for Organizational Excellence
Trade off between turn over cost with plant facilities

NISSAN MOTORS
Strategic
International
Financial
Management

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