Objectives of cash management

The general principles that apply to cash management on an international basis are frequently similar to those utilized by many companies domestically. The overall cash management objec tive of any corporation is to minimize the cash balance within the company, with the goal of optimizing corporate fund utilization. However, the parameters within which MNCs operate are broader and more complex than those of purely domestic companies. Furthermore, the relationships among these parameters are constantly changing. Hence those responsible for cash management on an international basis must consider new variables such as tax concepts, governmental restrictions on intracompany fund flows, differences in cultures, and foreign-exchange rates.

More specifically, international cash managers try to attain the traditional objectives of domestic cash management on a global basis: (1) to minimize the cost of funds, (2) to improve liquidity, (3) to reduce risks, and (4) to improve the return on investment.

First, with interest rates of more than 10 percent in many countries, considerable savings are possible when the cost of funds is lowered. MNCs should attempt to reduce their overall cost of funds by increasing internal funds and reducing borrowings.

Second, international cash managers must attempt to improve liquidity on a global basis. Certainly, it is difficult to improve liquidity on a worldwide basis, because government regulations prohibit the free transfer of funds. But MNCs can use centralized cash management and electronic fund transfers to improve their overall liquidity.

Third, international cash management involves a variety of risks, such as political, economic, and exchange risks. Insurance, careful negotiations, forward contracts, and currency options may be used to reduce these risks.

Fourth, a variety of ratios, such as return on investment and return on net worth, are often used to measure performance. The improvement of financial performance is perhaps the most important aspect of treasury management.

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