Multinational working capital management is the management of current assets and current liabilities of any multinational company who has large number of branches and subsidiaries in different countries. In simple words, we manage the inventory, cash, our short term investments, our creditors and currency exchange risks. By managing this, multinational company can reduce its cost and increase the money for paying day to day expenses.
1. Inventory Management
Inventory management means to reduce the carrying and holding cost of inventory. At international level, company has to take following decisions.
1. What is the quantity of production?
2. Where will it produce its goods?
3. From where will it buy the raw material?
4. Which transport will it use for transferring goods?
5. Where will it store its products?
For getting answer of all these questions, multinational company has to analyze its past records. Quantity of production depends on the demand of customers. Past sales records of its different branches will be helpful better financial decision relating to the quantity of production.
Company should produce near the location of production. But it also see the labour cost and other overhead cost. But affect the production location. After analyzing the labour cost, delivery cost, raw material availability and other overhead cost, company has to take this decision.
2. Cash Management
Company can use centralized cash management system and decentralized cash management system. Every transaction relating to receipt and payment is recorded. In centralized cash management system, all cash is collected in head office. Only authorized order, cash is issued from head office. Through cash pooling company can use CCM better way. In this system, company’s cash is deposited in their local financial institutions and banks from different branches. Financial institute or bank converts all cash into pool. So, without paying any fees, any bank uses this fund. There is also not any low balance problem. Because other branch’s fund can easily be used for payment.
3. Currency Risk Management
In multinational currency management, currency risk will effect. If home currency will weak and other country’s currency will strong, it will affect your total calculation of working capital. For example, you have to pay your one employee 1000 $ in Indian currency, it is your current liability. Today exchange rate is Rs. 50/ 1 $. For this, you have to pay Rs. 50,000. Suppose, you have deposited RS. 50,000 in Indian bank for paying your Indian employees, but due to Indian currency fluctuation, exchange rate becomes Rs. 55/ 1$. It means, you have to pay more Rs. 5000. This Rs. 5000 is your loss due to currency rate changes and your liability may be increased or reduced. By using inter-currency transactions and hedging, you can control the effect of changes in currency rates.
4. Current liabilities Management
Every branch’s current liabilities may be different from other branch. There should be proper rules for paying within the time limit. Optimize and improvement in payment process will increase your working capacity. In India, multinational company uses line of credit for paying its small expenses. With this, interest is charged only when the money is withdrawal for paying expenses.