International Dimensions of Cash Management

It is extremely common for multinational firms to have divisions in different countries, each having accounts receivable and accounts payable, as well as other sources of cash inflows and outflows, denominated in a number of currencies.  If the divisions are left to manage their own working capital, it can happen, for example, that one division is hedging a long pound position while at the same time another division is hedging a short pound position of the same country.  This situation can be avoided by netting, which involves the calculation of the overall position in each currency.  This calculation requires some central coordination of cash management.  The benefit that is enjoyed from the ability to net cash inflows and outflows through centralized cash management comes in the form of reduced transaction costs.  The amount that is saved depends on the extent that different divisions deal in the same currencies and have opposite positions in these currencies.  The benefit also depends on the length of the period over which it is feasible to engage in netting.  This in turn depends on the ability to practice leading and legging.  Leading and lagging involve the movement of cash inflows and outflows forward and backward in time so as to permit netting and achieve other goals.  However, when transactions are between divisions of the same multinational corporation, the scope for leading and lagging is considerable.  Recognizing this, governments generally regulate the length of credit and acceleration of settlement by putting limits on leading and lagging.  The regulations vary greatly from country to country, and are subject to change, often with very little warning.  If cash managers are to employ leading and lagging successfully and not find themselves in trouble with tax authorities, they must keep current with what is allowed.  When cash management is centralized it is possible not only to net inflows and outflows in each separate currency, but also to consider whether the company’s foreign exchange risk is sufficiently reduced via natural diversification that the company need not hedge all the individual positions.