International Working Capital Management

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Opening Case 15: An Efficient Global Treasury Structure

GeoLogistics Corp. was formed in February 1996 as a global provider of logistics and transportation services for manufacturers and distributors in technology, communications, and aerospace. The company executed five major acquisitions within 30 months and its 1999 sales reached $1.5 billion, 50 percent of which came from outside North America. The company is now a global organization with operations in 32 countries around the world. As the company expands its network through acquisitions, the need for greater control over international treasury operations becomes obvious. With more than 80 banks serving 30 countries in Europe and Asia, it is a challenge for the company to find workable solutions that meet its needs and budgets.

GeoLogistics decided to establish an efficient global treasury structure that would reduce debt, improve settlement practices, and increase the efficiency of cash management. The company selected ABN AMRO Bank of Ireland as its sole treasury-service provider. Ireland was attractive because of favorable tax environments and agency or outsourcing capabilities, which meet GeoLogistics' needs. The Dublin International Financial Service Center (IFSC) was established by the Irish government in 1987 to provide licenses to financial institutions, which offer treasury agency services to foreign companies. ABN had an established IFSC agency capability, an international network, and the treasury outsourcing expertise to achieve the company's objectives.

GeoLogistics' operational guidelines for ABN outlined policies for investments, lending, funding, foreign exchange, disbursements, and financial reporting. Under these guidelines, ABN has reduced the company's idle cash by $20 million per year, with a corresponding reduction in external debt. Specifically, to improve the company treasury services, ABN centralized all intercompany lending and hedging activity through a single IFSC vehicle; established a monthly netting system; designed an effective euro-based cash pool, and increased control with a simplified structure.

Source : Terry Clark and Tom Maleese, "Achieving an Efficient Global Treasury Structure," Euromoney, Mar. 2000, pp. 40—2.

The management of current assets and current liabilities constitutes working capital management. The efficient allocation of funds among various current assets and the acquisition of short-term funds on favorable terms are conceptually the same for both multinational companies (MNCs) and domestic companies. However, these two types of companies are different because they do business in different environments. These differences include the impact of currency fluctuations, potential exchange controls, and multiple regulatory and tax jurisdictions on working capital decisions. In addition, MNCs enjoy a wide variety of short-term financing and investment opportunities.

Chapters 11—14 discussed various short-term sources of funds in detail. Thus, this chapter emphasizes current asset management, which can be viewed as either a dynamic (flow) process or a static (stock) responsibility. The first part of this chapter — the dynamic approach — focuses on the denomination of liquid funds by currency and the placement of such holdings by country. This flow process places a heavy emphasis on transfers of liquid funds from one geographical location or currency to another. The second part — the static approach — focuses on individual processes such as the composition of various current assets. The important aspect of this approach is how to determine appropriate levels of cash, accounts receivable, and inventories.

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