CH15sguide - 15 CapitalManagement ChapterObjectives 1 To...

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Chapter Objectives 1. To describe the importance of working capital management and the constraints of current asset management. 2. To list different channels available to move funds from one country to another. 3. To explain how MNCs can expedite the collection of funds and delay the disbursements of funds. 4. To explain why MNCs centralize their cash management and how they invest their excess funds. 5. To discuss accounts receivable management with a particular emphasis on currency value problems. 6. To identify the inventory management problems faced by MNCs and the techniques they can use to deal with these problems. Chapter Outline I. Basics of Working Capital Management A. Working capital management refers to the management of current assets and liabilities. i. Domestic companies differ from multinational companies due to the different business environment that they operate in. International Working Capital  Management      201 15 International Working  Capital Management
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ii. Working capital management can be viewed as a dynamic (flow) or a static (stock) responsibility. iii. The basic objective is to determine the optimal amount of investment in various current asset accounts, i.e. the level of current asset holdings that maximizes the overall profitability of the firm. B. The importance of working capital management i. It is important because it involves the largest portion of a financial manager’s time. ii. It is important because current assets represent more than half of the total assets of most companies. C. Literature on working capital management is limited because: i. Decisions on working capital are relatively routine and frequent. ii. Working capital decisions are easily reversible. iii. Working capital management requires cash flow projections, and the financial manager alone cannot forecast these. This means that the financial aspects of the decision are sometimes concealed by marketing (credit policy) and production (inventory management). D. Net working capital funding is made up accounts receivable, inventory levels, and accounts payable. i. Cash and short-term debt are not included because they are not spontaneous. ii. MNCs attempt to minimize their net working capital. 1. MNCs should reduce the cycle until the marginal revenue generated equals the marginal cost. iii. Net working capital is typically computed on a days sales basis using the following formula: days working capital = days receivables + days inventory – days payables. E. Economic constraints of current asset management i. Foreign exchange constraints: international fund flows involve foreign exchange transaction costs and exchange rate fluctuations.
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CH15sguide - 15 CapitalManagement ChapterObjectives 1 To...

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