Question

1. Outline and discuss functions involved in international cash management. Explain how the MNC’s optimization of cash flow can distort the profits of a subsidiary.

Answer 1

International Cash management is a financial term associated to the actions that a company,which operates globally,performs in order to optimize the cash flows and therefore improve the overall performance of the MNC.It enhances over the cash flows of an international company and regulates it in order to effectively manage the cash streams.

The objective of International Cash Management is to maximize funds availability at a set level of operating cost and foreign exchange risk,and hence excess cash can be effictively utilized.

MNCs use the International Cash Management that provide different types of benefits.The international cash management has multiple functions such as forecasting the cash flows in order to plan an adequate budgeting and cash levels.Gaining the advantage by use of techniques such as leading and lagging of liquidity through monitoring the cash inflows and if necessary,investing the excess of cash inflows.

Most of MNCs will use different types of techniques in order to improve  the international cash flow management but some of the techniques adversly affect the individual units.Use of techniques like transfer pricing in order to reduce taxes ,can benefit one department in one country and may affect other department in other country adversly.This can distort the performance of the subsidiary individually.Techniques like leading and legging can also distort the performance of one subsidiary on benefit on other by managing funds shortage.