In: Accounting
Nestle, the Swiss foods conglomerate is as
multinational as a company can be. About 98% of its sales takes
place oversea, and the group’s diversified operations span 150
countries. Nestle’s numerous (and generally wholly owned)
subsidiaries are operationally decentralized. However, finances are
centralized in Vevey, Switzerland. Staffed by only 12 people, the
finance department makes all subsidiary funding decisions, manages
the resulting currency exposures, determines subsidiary dividends
amounts, sets the worldwide
debt/equity structure, and evaluates subsidiary performance.
Nestle’s centralized finance function plays the pivotal role in the
firm’s intricate web of subsidiary-to-headquarters profit
remittances and headquarters-to-subsidiary investment flows.
Profits and excess cash are collected by the treasury department in
Vevey and then channeled back to overseas subsidiaries in the form
of equity and debt investments. Nestle considers this approach to
be the best possible investment for the group’s wealth.
When a subsidiary is first established, its fixed assets – which
form about half of the total investment – are financed by the
Nestle group, generally with equity. Later on, the group may supply
long-term debt as needed to support operations. The local
subsidiary manager handles all the marketing and production
decisions, but decisions regarding long-term debt and equity
funding are managed solely by Vevey headquarters.
The other half of the investment – working capital – is then
acquired locally, usually via bank credit or commercial paper.
However, Nestle varies this general approach to suit each country.
In certain countries – those that permit free transfers of funds –
Nestle finances part of the working capital from Vevey instead of
using local bank credits.
Central control over affiliate capital structures is facilitated by
the policy of forcing local managers to dividend out almost 100% of
their profits to Switzerland. The particular capital structure
chosen for an affiliate depends on various considerations,
including taxes, political risk, and currency risk.
To ensure that it borrows at the lowest possible cost, Nestle takes
considerable care to structure its capital base to keep a top
credit rating. The desire for a low-risk capital structure is also
consistent with Nestle’s business strategy. According to Senior
Vice President, Finance, Daniel Regolatti, “Our basic strategy is
that what an industrial company are. We have a lot of risks in a
lot of countries, so we should not add high financial risks.
Required:
Why Nestle finances part of the working capital from Vevey instead
of using local bank credits? Elaborate the advantage and/or
disadvantages from the above statement.
Working Capital Finance by M/s Nestle in the given question
Working capital means the part of investment in an organisation which i mainly invested in inventory, account receivables and short term securities. Working capital finance may be of two types
Long term finance is required throughout the year and it quantum is generally not flactuating in nature while short term working capital is fluctuating in nature and it depends on the current working operations levels. keeping this aspect in view, this could be one of the reason for which like fixed assets investment, M/s Nestle finance a part of wokring capital also centrally.
The strategy of financing working capital centrally may have advantage of getting lower rate of interest on account of better credit rating . Further negotiating power of the company also increases when it negotiate for the group as a whole rather than as a company. This may also enrail some disadvantages in form of high transaction and compliance cost