Centralized Cash Management Operations of Multinational Corporations

International money managers attempt to attain on a worldwide basis the traditional domestic objectives of cash management: (1) bringing the company’s cash resources within control as quickly and efficiently as possible and (2) achieving the optimum conservation and utilization of these funds.

Accomplishing the first goal requires establishing accurate, timely forecasting and reporting systems, improving cash collections and disbursements, and decreasing the cost of moving funds among affiliates. The second objective is achieved by minimizing the required level of cash balances, making money available when and where it is needed, and increasing the risk-adjusted return on those funds that can be invested. Restrictions and typical currency controls imposed by governments inhibit cash movements across national boundaries. These restrictions are different from one country to other. Managers require lot of foresight, planning, and anticipation. Other complicating factors in international money management include multiple tax jurisdictions, multiple currencies, and relative absence of internationally integrated interchange facilities for moving cash quickly from one place to other. However, by adopting advanced cash management techniques MNCs are able to take advantage of various opportunities available in different countries. By considering all corporate funds as belonging to a central reservoir or ‘pool’ and managing it as such, overall returns can be increased while simultaneously reducing the required level of cash and marketable securities worldwide.

Advantages of Centralized Cash Management System

When compared to a system of autonomous operating units, a fully centralized international cash management program offers a number of advantages, such as;

  1. The corporation is able to operate with a smaller amount of cash; pools of excess liquidity are absorbed and eliminated; each operation will maintain transactions balances only and not hold speculative or precautionary ones.
  2. By reducing total assets, profitability is enhanced and financing costs reduced.
  3. The headquarters staff, with its purview of all corporate activity, can recognize problems and opportunities that an individual unit might not perceive.
  4. All decisions can be made using the overall corporate benefit as the criterion.
  5. By increasing the volume of foreign exchange and other transaction done through headquarters, banks provide better foreign exchange quotes and better service.
  6. Great expertise in cash and portfolio management exists if one group is responsible for these activities.
  7. Less will be lost in the event of an expropriation or currency controls restricting the transfer of funds because the corporation’s total assets at risk in a foreign country can be reduced.

The foregoing benefits have long been understood by many experienced multinational firms. Today the combination of volatile currency and interest rate fluctuations, questions of capital availability, increasingly complex organization and operating arrangements, and a growing emphasis on profitability virtually mandates a highly centralized international cash management system. There is also a trend to place much greater responsibility in corporate headquarters. Centralization does not necessarily imply control by corporate headquarters of all facets of cash management. Instead, a concentration of decision making at a sufficiently high level within the corporation is required so that all pertinent information is readily available and can be used to optimize the firm’s position.


In a typical multinational family of companies, there are a large number of intra-corporate transactions between subsidiaries and between subsidiaries and the parent. If all the resulting cash flows are executed on a bilateral, pairwise basis, a large number of currency conversions would be involved with substantial transaction costs. With a centralized system, netting is possible whereby the cash management center (CMC) nets out receivables against payables, and only the net cash flows are settled among different units of the corporate family.

Payments among affiliates go back and forth, whereas only a netted amount need be transferred. For example, the German subsidiary of an MNC sells goods worth $1 million to its Italian affiliate that in turn sells goods worth $2 million to the German unit. The combined flows total $3 million. On the net basis, however, the German unit need remit only $1 million to the Italian unit. This is called bilateral netting. It is valuable, though only if subsidiaries sell back and forth to each other. But a large percentage of multinational transactions are internal — leading to a relatively large volume of inter-affiliate payments — the payoff from multilateral netting can be large, relative to he costs of such a system.

The netting center will use a matrix of payables and receivables to determine the net payer or creditor position of each affiliate at the date of clearing.

Cash Pooling

The CMC act not only as a netting center but also the repository of all surplus funds. Under this system, all units are asked to transfer their surplus cash to the CMC, which transfers them among the units as needed and undertakes investment of surplus funds and short-term borrowing on behalf of the entire corporate family. The CMC can in fact function as a finance company which accepts loans from individual surplus units, makes loans to deficit units and also undertakes market borrowing and investment. By denominating the intra-corporate loans in the units’ currencies, the responsibility for exposure management is entirely transferred to the finance company and the operating subsidiaries can concentrate on their main business, viz. production and selling of goods and services. Cash pooling will also reduce overall cash needs since cash requirements of individual units will not be synchronous.

Reinvoicing Centre

The concept of CMC can be combined with that of a reinvoicing centre. Under this system, notionally, all subsidiaries sell their output to the reinvoicing centre, which is located in a lowtax country. The sales are invoiced in the selling company’s currency. The reinvoicing centre takes title to the goods and in turn sells to third party customers, as well as other members of the corporate family which may be production and/or sales subsidiaries. The actual deliveries are made from the selling units to the buying units. For intra-corporate sales, the buying units are invoiced in their respective currencies. Thus the entire currency exposure is transferred to the reinvoicing centre which can use matching and pairing to minimise recourse to forward markets or other hedging devices. Also, the reinvoicing centre can access foreign exchange markets more efficiently than individual subsidiaries. Leading and lagging can be used to transfer funds from cash-surplus units to cash-deficit units. CMCs, finance companies, and reinvoicing centres are generally located in major money market centres where active markets in foreign exchange and a variety of money market instruments are available. Also, the presence of an efficient banking system can facilitate speedy settlement of receivables and payables.

Issues of Centralized Cash Management System

Some important issues have to be sorted out before setting up a centralised cash management system with netting and cash pooling. If the CMC uses a single currency as the common denominator to compute net positions, this will lead to transactions exposure for individual subsidiaries. Hence the choice of the common currency must be made in the light of local currencies of the individual divisions, existence of sufficiently active forward markets and other hedging products between these currencies and the common currency and so forth. The second issue is related to rules governing settlement of debts within the system. If an individual subsidiary has a net debtor position, how much time should it be given to settle, how much interest should it be charged on overdues, how should it prevent a subsidiary from arbitraging between its local money market and the CMC (e.g.if a subsidiary can earn a much higher rate in the local money market than what it has to pay on overdues to the centre, it will have incentive to delay payments) are among the considerations which must be thoroughly analysed.

Disadvantages of Centralized Cash Management System

Despite these advantages, complete centralisation of cash management and funds holding will generally not be possible. Some funds have to be held locally in each subsidiary to meet unforeseen payments since banking systems in many developing countries do not permit rapid transfers of funds. Also, some local problems in dealing with customers, suppliers and so on, have to be handled on the spot for which purpose local banks have to be used and local banking relationships are essential. Each corporation much evolve its own optimal degree of centralisation depending upon the nature of its global operations, locations of its subsidiaries and so forth. Further, conflicts of interest can arise if a subsidiary is not wholly owned but a joint venture with a minority local stake. What is optimal with regard to cash and exposure management from an overall corporate perspective need not be necessarily so from the point of view of local shareholders.

Collection and Disbursement of Funds

Accelerating collections both within a foreign country and across borders is a key element of international cash management. Considering either national or international collections, accelerating the receipt of funds usually involves the following:

  1. defining and analyzing the different available payment channels,
  2. selecting the most efficient method (which can vary by country and customer),
  3. giving specific instructions regarding procedures to the firm’s customers and banks.

Management of disbursements is a delicate balancing act of holding onto funds versus staying on good terms with suppliers. It requires a detailed knowledge of individual country and supplier policies, as well as the different payment instruments and banking services available around the world. A constant review on disbursements and auditing of payment instruments help international firms achieve better cash management. The following questions may help international firms to find suitable methodology.

  1. What payment instrument are you using to pay suppliers, employees, and government entities ( e.g. checks, drafts, wire transfers, direct deposits )?
  2. What are the total disbursements made through each of these instruments annually?
  3. What is the mail and clearing float for these instruments in each country?
  4. What techniques, such as remote disbursement, are being used to prolong the payment cycle?
  5. How long does it take suppliers to process the various instruments and present them for payment?
  6. What are the bank charges and internal processing cost for each instrument?
  7. Are banking services such as controlled disbursement and zero-balance account used where available?

Management of the Short-term Investment Portfolio

A major task of international cash management is to determine the levels and currency denominations of the multinational group’s investment in cash balances and money market instruments. Firms with seasonal or cyclical cash flows have special problems, such as spacing investment maturities to coincide with projected needs. To manage, this investment properly requires (a) a forecast of future cash needs based on the company’s current budget and past experience and (b) an estimate of a minimum cash position for the coming period.

Common-sense guidelines for globally managing the marketable securities portfolio are as follows.

  1. Diversify the instruments in the portfolio to maximize the yield for a given level of risk. Don’t invest only in government securities. Eurodollar and other instruments may be nearly as safe.
  2. Review the portfolio daily to decide which securities should be liquidated and what new investment should be made.
  3. In revising the portfolio, make sure that incremental interest earned more than compensates for such added costs clerical work, the income lost between investments, fixed charges such as the foreign exchange spread, and commission on the sale and purchase of securities.
  4. If rapid conversion to cash is an important consideration, then carefully evaluate the security’s marketability (liquidity). Ready markets exist for some securities, but not for others.
  5. Tailor the maturity of the investment to the firm’s projected cash needs. Or a secondary market with high liquidity should exist.
  6. Carefully consider opportunities for covered or uncovered interest arbitrage.

Cash Transmission

An important but easy to overlook aspect of cash management is minimizing the unnecessary costs in the process of collecting cash from debtors and making payments to creditors. These costs arise from the so called “float”. A debtor issues a cheque or a draft in favor of the firm, but funds do not become available to the firm till the instrument is cleared through the banking system. This delay is the float. The treasurer must try and minimize the float in the cash collection cycle and take advantage of the float in the cash payment cycle.

The banking systems in various countries have evolved clearing mechanisms which aim at reducing the delays between a payment instruction being received and the payee actually being able to apply the funds. The CHIPS in the US, CHAPS in the UK are examples of such systems. SWIFT is an electronic network for cross-border funds transfers. A treasurer operating in a multinational framework needs a good working knowledge of these systems. Similarly banks around the world offer various facilities to their clients to speed up funds transfers. Direct debits, lock-box facilities and other such devices can help in cutting down these delays often enabling realization of value the same day. With the rapid strides in technology of banking and innovations like internet banking, it may be possible to virtually eliminate the delays and effect instant cash transfers from the payer to the payee.


  1. Alan C Shapiro, Multinational Financial Management (2002), Prentice-Hall of India, New Delhi.
  2. Prakash G Apte, Global Business Finance, Tata McGraw-Hill Publishing Company Limited, New Delhi.

Credit: Global Financial Markets-PU

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