Robert Dutkiewicz

Cash is one of the principal forces behind the success or failure of any company. Due to the state of the current global economy, it is becoming increasingly difficult for companies to achieve both their short and long-term financing needs. The long-term objective for many of today’s companies is to expand and compete on the global stage, and as companies begin to shift to the global arena, it’s more important than ever to evaluate and adopt sound cash management practices.

Companies must look beyond the traditional practices of:

• Debt service
• Collection of receivables
• Disbursements to vendors
• Forecasting

While these practices are instrumental to sound cash management, when operating internationally, it’s important to evaluate and implement new polices not traditionally used in domestic cash management. Implementing some of the topics discussed below can be the vehicle to giving your company the extra edge.

Centralized Cash Management – Alleviating the Challenges of Cross-Border Transactions

Managing cash across borders with numerous bank accounts and currencies can often be a challenging undertaking for most companies. A means to alleviating some of the challenges is implementing a centralized cash management system. Centralized cash management systems offer more efficiently handled cash and produce a greater rate of return on cash investments. Under a centralized system, each subsidiary only worries and forecasts cash demands for their own subsidiary. The parent company then controls and distributes cash around the organization to meet required working capital needs, or maximize investment returns.

Cash savings are produced in several ways. For example, if the parent company determines, based on forecasting needs, that Subsidiary A will have a $100,000 short fall of cash this month, but Subsidiary B will have a $125,000 surplus, they can move cash from one subsidiary to the other. As a result, Subsidiary A does not need to obtain financing from an outside financial institution.

In addition, cash can be pooled from multiple locations to help maximize the rate of return on an investment. If the organization has excess cash not being used for operations, the company can consolidate cash into one account, receiving the most advantageous interest rate and earning a higher rate of return due to a larger balance and maximum interest rate.

Last, companies that operate with multiple currencies can maintain separate accounts of foreign currencies and distribute them to subsidiaries when in demand, reducing periodic translation costs.

Using a Netting Policy to Reduce Clerical and Transaction Costs

By putting into practice a centralized cash management system or working directly with subsidiaries and other companies, a netting policy can be implemented to assist in reducing clerical and transaction costs. The objective of a netting policy is to accumulate two or more companies’ transactions, whether it is collections or payments, for an extended period of time and aggregate transactions into batches.

Accumulating the balances over a period of time will succeed in reducing the quantity of transactions that occurs between companies. Instead of collecting or paying on multiple transactions a month, a single aggregated transaction can occur. The reduction to the number of transactions will yield several benefits:

The overall administrative and banking charges will be reduced, as decreased number of transactions will free up company resources and reduce cash transfer fees

For international transactions, costs typically associated with translation expense will be reduced. In addition, it can also act as hedge against currency losses connected with translation, and reduce normal banking fees

Netting can improve control over a company’s cash position

With fewer transactions, companies will find it easier to monitor and predict cash inflows and outflows.

Restriction of Funds – Getting the Money In and Out

Many countries such as Brazil and China have strong currency control measures. Many foreign governments mandate that profits generated within their borders be reinvestment into the local economy to help stimulate economic growth or recovery. Understanding these controls is important to effectively managing your cash and providing the needed capital to keep your business strong.

Some countries, such as China, restrict money entering or exiting the country. Generally, only the approved paid-in capital can be remitted to certain bank accounts in China, and only reasonable amounts are allowed to be converted to the local currency RMB. However, often time’s companies that are importing and exporting out of China will be allowed to pay and receive funds in CNY. Furthermore, select companies are now permitted to open non-resident CNY accounts. Due to the constant state of flux in currency regulations and restrictions, it’s imperative that you talk to an experienced professional before implementing any new policies.

Intercompany Transfers – A Tool to Manage Cash and Earnings

In addition to the policies discussed above, there are further tools an international parent subsidiary relationship can use to help manage cash and earnings. The most familiar method is through intercompany agreements for services or products. Although establishing intercompany arrangements can be an effective means of cash management and tax planning, many government agencies are aggressively examining companies’ records, and have become diligent in ensuring that companies are observing the set forth regulations. Penalties can be harsh for companies that do not comply with the international transfer pricing regulations; therefore, it is important a proper analysis of transferring pricing is performed before being implemented.

Transfer pricing, put simply, is moving goods and services across borders to related companies. Transactions must be performed at an arm’s-length, meaning that prices would be the same for any other company on the open market. Transfer pricing can be an effective tool to:

• Help shift income between tax jurisdictions
• Lower taxes paid
• Be used as a way to counter blocked funds, as discussed above

Before setting up the intercompany transactions, a services tax and other withholding tax should be considered. For example, the service providers may subject to a 5% service tax if the clients are in China, even the services are provided in the United States.

Another approach of intercompany relationships is using leading and lagging. Under this approach, subsidiaries can either pay for supplies from the parent company in advance, known as leading, or the parent can lend supplies to its subsidiaries and not require payment straight away, known as lagging. Leading and lagging can help free up additional cash to service debt or fund other operational requirements.

Operating abroad can very different from doing so domestically, as foreign governments and banking systems are very different from our own