Working Capital Management’s [hereafter abbreviated WCM] accepted purpose has been the management of a firm’s current assets and current liabilities in a way that achieves the optimum balance between liquidity and profitability. On the one hand, obviously, a high level of net working capital implies funds invested in current assets that increase a firm’s liquidity but reduces its returns, because current assets are less profitable than long-term assets. On the other hand, however, a low level of net working capital results in increased profitability, since funds are put to better use, but increases the firm’s risk of technical insolvency. The bottom line is that any suboptimal level of net working capital in the end reduces the return to shareholders by lowering the firm’s value (Gitman, 2000, p. 616). However, “[t]he ‘collect early, push out the product and pay late’ attitude, familiar to many treasurers, squeezes both customers and suppliers and […] is increasingly recognized as short -term and potentially damaging to business” (Hall, 2002, p. 29). Therefore, it is of supreme importance to understand the complex and not openly visible ties of working capital and its components to a company’s strategy and operations, rather than treating WCM as an isolated task. WCM for multinational corporations is in its core very similar to purely domestic WCM. However, in the international realm there exist a few essential differences that add complexity. Consider “the impact of currency fluctuations, potential exchange controls, and multiple tax jurisdictions […], in addition to the wider range of short -term financing and investment options available” (Shapiro, 2005, p. 516). This paper will discuss the main components of WCM (international cash management, accounts receivables/payables, etc.) as well as the implications of managing working capital in the international sphere, while taking into consideration a more profound approach to WCM that goes beyond the superficial understanding of working capital as an isolated item solely under the control of the finance or treasury department. [...]
Table of Contents
- INTRODUCTION
- DRIVERS FOR WCM
- INTERNATIONAL CASH MANAGEMENT
- Who is responsible?
- Managing Float.
- Netting of Payments.
- Investment of Excess Funds
- Establishing the required Cash Level
- Bank Relations
- THE SCOPE OF WORKING CAPITAL
- Inventory Management..
- Account Receivables Management
- SHORT-TERM FINANCING
- Unsecured sources of short-term loans
- Secured sources of short-term loans
- CONCLUSION.
Objectives and Key Themes
This paper focuses on working capital management (WCM) for multinational corporations, highlighting the key differences between domestic and international WCM. The paper emphasizes the importance of balancing liquidity and profitability in WCM, and the role of efficient WCM in supporting a company's overall strategy and financial performance.
- Optimizing Working Capital for Profitability and Liquidity
- Strategic Drivers of Efficient WCM
- International Cash Management: Centralization and Benefits
- Managing Accounts Receivables and Payables in a Global Context
- Short-Term Financing Options for Multinational Corporations
Chapter Summaries
- Introduction: The chapter introduces the concept of working capital management (WCM) and its importance for achieving an optimal balance between liquidity and profitability. It highlights the need for a comprehensive approach to WCM, considering its strategic implications beyond purely financial aspects.
- Drivers for WCM: This chapter discusses the main drivers for efficient WCM, focusing on unlocking internal cash for strategic projects, improving key ratios for favorable valuation, and securing access to capital markets. The chapter illustrates the benefits of superior WCM using the example of Dell Computer.
- International Cash Management: This chapter delves into the complexities of cash management in multinational corporations. It highlights the key considerations such as currency fluctuations, exchange controls, and multiple tax jurisdictions. The chapter then discusses the benefits of centralized cash management in multinational corporations, arguing that it facilitates efficient intra-subsidiary netting, reduces transaction fees, and enhances the parent company's bargaining power with banks.
Keywords
Working capital management, multinational corporations, liquidity, profitability, strategic drivers, international cash management, centralization, netting of payments, short-term financing, currency fluctuations, exchange controls, tax jurisdictions, accounts receivables, accounts payables.
- Quote paper
- David Federhen (Author), Mark-Oliver Behrens (Author), Marcel Springer (Author), 2004, Working Capital Management for multinational corporations, Munich, GRIN Verlag, https://www.grin.com/document/26785
