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Home | Business | Management

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Cash Flow Management

By: Robert II Smith

Multinational firms must determine a means of managing cash flows and financial resources. Whether they use a centralized or decentralized approach, the firm may choose either of the following structures: netting, cash pooling, leads and lags, reinvoicing, or internal bank. These structures may be combined when necessary based on the needs of the individual firm. The host countries may also restrict or prohibit some of the techniques, so once again, firms must be flexible when making a decision on a particular structure to use.

There are three types of foreign currency exposures which may cause substantial risks for firms. They include transaction, economic and translation exposures. Transaction exposure is the potential for losses or gains of currency during the completion of a foreign currency transaction. This type of exchange risk is the most common. Firms that constantly import and export products will deal with transaction exposure on a regular basis.

Economic exposure is the risk that unexpected exchange rate changes will cause a positive or negative affect on long term cash flows. This is also known as operating exposure. All firms will in some way be affected by economic exposure. The main concern for managers is how to be prepared for the unexpected. A key way is for firms to be diversified in its operations.

Translation exposure is the potential affect of changes in values on a firm’s financial statements. This exposure is an accounting issue and is considered an economic problem. The risk comes from the legal requirement that all firms must consolidate their annual balance sheets and income statements for all units.

Counter trade has traditionally been when countries trade with each other using goods as payment for other goods rather than for currency. This is also known as bartering. Countertrade is encouraged by a lack of money, lack value of or faith in money, lack of acceptability of money as a medium of exchange, or the ease of using goods versus currency as payment. The use of countertrade has become very acceptable for firms entering new markets.

Corporate governance is the relationship between a firm and its stakeholders in the determination and control of the strategic direction of the firm. The key objective of corporate governance is maximization of shareholder returns. The Organization for Economic Cooperation and Development (OECD) established a statement of good corporate governance practices. These principles are as follows: rights of shareholders, equitable treatment of shareholders, role of shareholders in corporate governance, disclosure and transparency, responsibilities of the board.

The structure of corporate governance includes internal factors and external factors. The internal factors along with the Board of Directors and the officers of the corporation have the responsibility of determining the strategic direction of the firm. The external forces will make sure that the strategy is valid and feasible for the organization. External forces include auditors, regulators, analysts and etc.

The methods used in corporate governance will vary significantly from country to country for many reasons. One major reason in which the methods may differ is accounting diversity. This diversity may lead to poor business decision making, difficulty in raising capital in a new market, or the inability of a firm to monitor competitive factors.

Many of the accounting standards of countries may be similar, yet the objectives of the parties who will use the accounting information will vary. There are nine major areas where differences in accounting practices are seen: research and development, fixed assets, inventory accounting treatment, capitalizing or expensing leases, pension plans, income taxes, foreign currency translation, mergers and acquisitions, consolidation of equity securities holdings.

A focus of governments is to implement taxes that will not burden domestic or foreign companies and result in restrain on trade. There are several treaties in place which prevent double taxation. The two approaches used by governments in international taxation are residential approach or source approach. With the residential approach, the international income of a resident is taxed regardless of where the income has been earned. With the territorial approach, all parties within its particular territory are taxed regardless of country of residency. In order to tax both domestic and internal firms equally, most countries will use a combination of the two approaches.

The two tax classifications are direct and indirect. Direct taxes are based on the actual income of the individual or firm. Indirect taxes are based on and applied to non-income items. Examples of indirect taxes are excise taxes, tariffs, and sales taxes. Most countries primarily rely on income tax revenue to raise capital.

Three methods used to transfer funds across tax jurisdictions are royalties, interest, and dividends. According to the text:

Royalties are under license for the use of intangible assets such as patents, designs, trademarks, techniques, or copyrights. Interest is the payment for the use of capital lent for the financing of normal business activity. Dividends are income paid or deemed paid to the shareholders of the corporation from the residual earnings of operations.

Article Source: http://www.gcyarticles.com

Robert Smith has spent more than 15 years working as a professor at New York University. He is interested in helping students and people who need assistance in writing. Now he spends most of his time with his family and shares his Univesity experience in writing reports and reviews online.

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