ADVERTIsem*nTS:
This article throws light upon the top three techniques to optimize cash flows. The techniques are: 1. Accelerating cash inflows 2. Minimizing currency conversion costs 3. Managing inter-subsidiary cash transfers.
Optimize Cash Flow Technique # 1. Accelerating Cash Inflows:
Cash inflows can be prompted through quick deposit of customer’s cheques, establishing collection centers, lock-box method and other devices.
Optimize Cash Flow Technique # 2. Minimizing Currency Conversion Costs:
Cash flow can also be optimized through Netting. Netting involves offsetting receivables against payables of the various entities so that only the net amounts are eventually transferred among affiliates. An MNC can also utilize multilateral netting with outside firms and agencies.
ADVERTIsem*nTS:
This technique optimizes cash flow by reducing the administrative and transaction costs arising out of currency conversion. It also reduces unnecessary float, funds that are in the process of being transferred among affiliates instead of being invested by the centre.
The process of netting forces tight control over information on transaction between subsidiaries leading to greater coordination among all subsidiaries to accurately report and settle their various accounts. Netting also makes cash flows forecasting easier since only net cash transfers are made at the end of each period, rather than individual cash transfers throughout the period.
There are two kinds of netting. A bilateral netting system involves transactions between two units: between the parent and a subsidiary or between two subsidiaries. A multilateral netting system usually involves a more complex interchange among the parent and several subsidiaries’.
Multilateral netting system is most useful to MNCs in reducing administrative and currency conversion costs. Such a system is highly centralized so that all necessary information’s are consolidated. With the help of the consolidated cash flow information net cash positions for each pair of units (subsidiaries or whatever) can be determined and the actual reconciliation at the end of each period can be dictated.
Optimize Cash Flow Technique # 3. Managing Inter-Subsidiary Cash Transfers:
ADVERTIsem*nTS:
Through techniques of leading and lagging cash flows can be managed to the advantage of a subsidiary. For example, firm A needs funds, while firm B has surplus funds. If A purchases supplies from B and pays for its supplies earlier than necessary, this technique is called leading.
Alternately, if B sells supplies to A, it could provide financing by allowing A to lag its payments. The leading or lagging strategy can help in improving efficiency of cash utilization and thereby reducing debt. Some host governments prohibit this practice by requiring that a payment between subsidiaries occurs at the time at which goods are transferred.
MNC management must, therefore, be aware of existence of such prohibitory laws.
