January 18, 2012

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Crossing the Border?

Navigate International Cash Management Rules

David Pierce

January 18, 2012

In today’s tough economic climate, many businesses are looking to expand beyond the local U.S. market in order to grow. Conducting business overseas can provide more challenges than some business owners expect. One of the most overlooked aspects of doing business internationally is effectively managing cash flow. Domestically, companies put tremendous time and effort into maximizing their cash, reducing their outstanding loans, speeding up collections and reducing the cost of making payments. When companies venture into the international arena, they discover a whole different world when it comes to managing cash flow. We are the beneficiaries of the largest and most efficient economy in the world. One of the biggest pitfalls treasury managers face when beginning to expand internationally is mistaking our own good fortune for the status quo. One must realize that every country’s banking laws, regulations and payment systems are different. This means business owners may need to have different banking relationships within each country. A perfect example is the Eurozone, which was created to facilitate more efficient trade and treasury functionality. Many of the major banks in each country market their abilities throughout the whole Eurozone. But an astute cash manager will not assume that cash management services that span the Eurozone are similar to those crossing state lines in the U.S. Though the countries use the same currency and share some common clearing mechanisms, each country has its own rules and fee structures. There is no one-size-fits-all system. It is imperative that treasury managers understand the most important issues facing their company and make sure that the international financial institutions are capable of providing the services necessary. Additionally, as companies do business in less developed nations, it may be wise to have relationships with several banks in different geographic locations. Finance executives will also need to consider other variables when managing cash flow for a global company. For example, consider a U.S. manufacturing company that recently opened subsidiaries in England, Germany and France. The U.S. parent company manufactures products that the European subsidiaries will sell in each of their respective countries. The company now has several issues to deal with including two additional currencies to worry about: the British Pound and the Euro. Best practices in global cash management suggest that the majority of the finance functions will be centralized at the parent company, and the business needs to open at least one bank account in each of these countries. In this scenario, additional challenges will also arise when the company wants to efficiently manage its cash. For instance, the German subsidiary may have excess cash, and the France subsidiary may not yet be profitable and needs cash. Although these subsidiaries have the same functional currency, the Euro, they can’t just move money between them without impact. As each entity is incorporated in different countries, they pay taxes based on their local income. Also, the profit of one entity can’t be offset by the losses of another. If the German subsidiary loans money to the French subsidiary, they have now created an inter-company loan. This loan will need to be tracked and interest will need to be paid on the loan. Consider the following tips when managing global cash flow: • Foreign Exchange: This can easily be the most critical point of your overall international cash management plan. As currencies constantly move and make big jumps, getting a handle on appropriate foreign exchange strategies is imperative. • Visibility: Ensure the parent company has access to all of the foreign bank accounts. It is important that this occurs on every account to allow for proper safeguarding of funds. Do as you would do here in the United States—only grant access to those employees you trust, and then have dual control. • Centralization: By centralizing treasury functions, businesses will have better controls, reduced expenses and the ability to effectively manage cash. • Banking Relationships: Try and optimize your banking relationships with best-in-class banks located in the areas you are doing business. Many people mistakenly think that it is the best idea to use a big global bank that has a presence in many countries. However, in many cases, this doesn’t mean they are getting better service; it simply means they pay much higher fees for sub-par local service. David Pierce is the director of business development for GPS Capital Markets, Inc. (www.gpsfx.com), a Corporate Foreign Exchange Brokerage Firm. He brings more than 20 years of experience in various facets of international banking such as transaction structuring, yield and price management, international payment flows and sales team management. He can be reached at 800-459-8181 or dpierce@gpsfx.com.
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