Managing short-term assets and liabilities and Foreign Investment Decisions

Submitted to: Pallavi Maam Submitted by: Alpa Vyas Ashish Sharma Dheera Joshi Pallavi Gupta Preeti Bhatt Tabassum Rasiya

Short-term Assets and Liabilities

Short-Term Assets and Liabilities

Cash Receivables Investment Inventories payables

Assets Liability Management

It is a dynamic process of planning, organizing & controlling of Assets & Liabilities- their volumes, mixes, maturities, yields and costs in order to maintain liquidity and Net Interest Income(NII).

 Its an important part of fund managers job. Funds flow continually in and out of corporation as1) goods are sold. 2) receivables are collected. 3) short-term borrowings are availed of. 4) payables are settled. 5) short-term investment are made.

Components
Cash Management Inventory management Receivables management Short term investments and borrowings

Cash Management
Cash management is most important and more complex. This is because of possibility of raising and deploying cash in many currencies and many locations. Profit opportunities are presented by imperfections in international money and foreign exchange markets.

 The essence of short-term financial management is1) minimizing working capital risk consistent with other policies. 2) raise short-term funds at minimum possible cost and deploy short-term cash surpluses at maximum possible rate of return.

Inventory Management
Inventory is in form of raw material, work-inprogress and finished goods. It is held to facilitate: 1. The production process by ensuring suppliers needs. 2. To make sure that goods are available at the time of sale.

 There are variety of reasons for difficulties faced in controlling oversea inventory. These are: 1. Long and variable transit time if ocean transport is used. 2. Lengthy custom proceedings. 3. Dock strikes. 4. Import controls. 5. Changes in currency values etc.

Accounts Receivables Management

Firms grant trade credit to customers, both domestically and internationally. This is because they expect the investment in receivables to be profitable either by expanding sales volume or by retaining sales that is lost by their competitors. Some companies also earn profit on financing charges they levy on credit sales.

 Need to scrutinize credit terms in countries experiencing rapid inflation. Finance and marketing coordination is very important for proper management of receivables. Educated sales force will work out for this.

Short-term borrowing and investment

International financial centers like London, New York and Tokyo offer variety instruments to raise short-term financing. Principal dimensions of borrowing-investment decisions are instrument, currency, location of financial centre and tax related issues.

 Apart from bank loans, the other major instruments for short-term funding are commercial paper and in US domestic money market, bankers acceptances. Commercial paper are accessible to corporations with high creditworthiness. It is cheaper than a bank loan.

Purpose & Objective of ALM

An effective Asset Liability Management technique aims to manage the volume, mix, maturity, rate sensitivity, quality and liquidity of assets and liabilities as a whole so as to attain a predetermined acceptable risk/reward ration.

stabilize short-term profits, long-term earnings and long-term substance of the bank.

The parameters for stabilizing ALM system are: 1. Net Interest Income (NII) 2. Net Interest Margin (NIM) 3. Economic Equity Ratio

FOREIGN INVESTMENT DECISIONS

It means firms become multinational when they undertake Foreign Direct Investment, i.e., FDI. It involves: Greenfield investment, ex. Hondas Ohio Plant Cross-border mergers & acquisitions, ex. Ford over Mazda and Jaguar. FDI help linking national economies and define emerging global economy.

Why do firms invest overseas??

There are some of the key factors which influence firms decision to invest overseas: Trade barriers Imperfect labor market Intangible assets Vertical integration Product life cycle Shareholder diversification services

Cross-Border Mergers & Acquisitions

This is an increasingly popular mode of FDI, which involves combining with or buying existing foreign businesses. Firms going multinational, undertake this for the following reasons: To encourage their competitive position in the global market. To get two key advantages over Greenfield investments, i.e., speed and access to proprietary assets. To get synergistic gains. To successfully internationalize R&D capabilities of the target.

Foreign Portfolio Investment (FPI)

Because portfolio investment earnings are more likely to be tied to the broader macroeconomic indicators of a country, such as overall market capitalization of an economy, they can be more sensitive to factors such as: High national economic growth rates. Exchange rate stability. General macroeconomic stability. Levels of foreign exchange reserves held by the central bank. General health of the foreign banking system. Liquidity of the stock and bond market. Interest rates.

Portfolio investors also look at the economic policy environment as well, and at factors such as: The ease of repatriating dividends and capital. Taxes on capital gains. Regulation of the stock and bond markets. The quality of domestic accounting and disclosure systems. The speed and reliability of dispute settlement systems. The degree of protection of investors rights.

Political Risks: Rules of the Game

These refer to the potential losses to the parent firm due to adverse political developments in the host country. Depending on the incidence, political risks can be classified as: Macro risk Micro risk And, depending on the manner in which firms are affected, political risks can be classified as: Transfer risk Operational risk Control risk

References
1. Cheal S. Eun. Bruce G. Resnick, International Financial Management TMH 2. A project report by 2013 The Levin Institute - The State University of New York 3. P.G. Apte, International financial management TMH 4. Alan C. Shapiro, Multinational Financial Management, Prentice Hall of India ,4th edition.

ANY QUESTIONS??