Investing excess funds

Along with optimization of cash flows, the other key function of international cash management is to make certain that excess funds are wisely invested. This section discusses three types of portfolio management and portfolio guidelines.

Portfolio management There are at least three types of portfolio management available to international cash managers. First, MNCs can optimize cash flows worldwide with a zero portfolio. All excess funds of subsidiaries are remitted to the parent and then used to pay the parent's short-term debts. Second, they can centralize cash management in third countries, such as tax-haven countries, and invest funds in marketable securities. Third, they can centralize cash management at headquarters, with subsidiaries holding only minimum amounts of cash for transaction purposes.

Portfolio guidelines Most surplus funds are temporary. If MNCs invest funds in marketable securities such as Treasury bills, they should follow sound portfolio guidelines. First, instruments in the short-term investment portfolio should be diversified to maximize the yield for a given amount of risk, or to minimize the risk for a given amount of return. Second, for companies that hold marketable securities for near-future needs of liquidity, marketability considerations are of major importance. Third, the maturity of the investment should be tailored to the company's projected cash needs. Fourth, the securities chosen should be limited to those with a minimum risk of default. Fifth, the portfolio should be reviewed daily to decide what new investments will be made and which securities will be liquidated.

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