Question

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 has operations abroad, performs in order to optimize the inflows and outflows of cash and therefore improve the overall performance of the MNC.It is the management of cash receivable and payables in international transaction by a multi national corporation.

The objective of International Cash Management is to maximise funds availability at a set level of operating cost and foreign exchange risk,and hence excess cash can be effectively utilised to achieve an edge in operational performance.

MNC's use the International Cash Management that provide different types of benefits.The International Cash Management has multiple functions such as forecasting the cash inflow and outflow in order to plan a current budgeting and cash level .Monitoring the cash flow and if necessary, investing the access of cash flow in order to obtain gains due to the time value of money.Optimizing cash flows lowering  operation cost and negotiating payments term by using techniques as leading and lagging of liquidity.

Most of the MNC's will use different types of techniques in order to improve the overall performance and helps to improve the benefits in general but it may be affecting some of the departments in negative way like when one uses the concepts like transfer pricing among units in order to reduce taxes and avoid exchange controls. These technique have serious implications on the performance of individual subsidiary and distort the individual performance of that subsidiary.Techniques like leading and lagging can also be used to benefit one unit at the cost of another unit.