Essay Sample on Multinational Working Capital Management

Working capital is a term used to refer to a financial metric representing operating liquidity that is available to an organization, a firm, or any other entity, even governmental organizations. It is considered part of operating Capital together with fixed assets like equipment and plant. The metric is calculated using the formula current assets minus current liabilities. If current liabilities outweigh current assets, the business is said to be working Capital deficient. This situation is also referred to as an operating capital deficit or negative Working Capital (Ahmed, 2018). This essay will look at some aspects of multinational working capital management, including operating and cash cycle, funds repositioning, cash, inventory and receivables management, and finally, the finance working capital.

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There exist four main components of working capital. These are inventory management, cash management, receivables management, and accounts payable management. Examples of working capital include spontaneous working capital, the funds easily available in the market, and short-term working capital. The latter consists of bank overdrafts, bill discounting, and cash credit, among others (Ben-Nasr, 2016).

Operating and Cash Cycle

The operating cycle, also called the working capital cycle, is the duration between inventory purchase, and when cash is received from the sales of the items produced. However, the cash cycle is the period between inventory payment and when money is obtained from the sales. In terms of time, it is the period after raw materials have been bought, until its conversion into cash. The Cash operating cycle and the operating cycle are frequently mistakenly used interchangeably (Dehghanfard & Moslemi, 2017).

Operating cycle = Raw Material Holding Period + Work-in-process Period + Finished Goods Holding Period + Receivable Collection Period.

The cash cycle also called the net operating cycle, is the gross operating cycle minus the creditors' collection period. It refers to the period in time within which the business needs the Working Capital.

Cash cycle = Inventory Holding Period + Receivable Collection Period – Creditor's Payment Period.

The operating cycle is essential to a business as it ensures smooth operations. The manager should possess an in-depth understanding of this concept and the attendant risks to manage a business effectively. On its part, the cash operating cycle is the pillar for working capital metrics. The finance manager should work on reducing the cash cycle to help save on interest costs. To achieve this, there is a need to increase the supplier's payment period and reduce the inventory holding period (Dehghanfard & Moslemi, 2017).

Repositioning Funds between Parent and Subsidiary

Fund repositioning is the moving of funds from one currency to another, or from one country to the next. The repositioning may be occasioned by the need to locate profits in areas with low tax rates, move cash out of areas experiencing negative economic and political situations, transfer funds to regions with high yields, and get some money out of countries with unfavorable exchange controls. The assumption is that there is no problem in moving of funds from one entity to another. However, for MNCs, certain challenges exist when moving funds, including political reasons in the form of heavy tax regimes, withholding taxes, high transaction costs, and liquidity requirements by banks. Funds may be transferred by way of dividends, transfer pricing, leads, lags, and license fees, royalties, loans, and overheads (Klettner et al., 2019).

Cash ManagementCash management also referred to as treasury management, is a vast field in finance involving the collection, handling, and management of cash flows from the firm's operation, investment, and financing. Cash flow exists in three categories, which are investing activities, financing activities, and operating activities. Operating activities are related to net income, while investing activities are related to noncurrent assets. The principles of cash management are increasing the speed by which the receivables are collected, maintaining low inventory levels, and delaying debts (Salas-Molina et al., 2018).

There are five different types of cash management tools: a checking account, which is used to transfer cash. It is easily accessible through in-person, ATM, or online or telephone. The accounts have lower interest rates, which vary according to banks and have a minimum balance. The money market is insured by the federal government, whose interest is pegged on the account balance held. It only allows for a limited number of transactions per month. A deposit certificate is a form of savings account, which earns interest but has allowed restricted access to cash. It only keeps the money for a limited period, which determines the period the money is to be deposited. Savings bonds are those issued by governments and are bought at half the face value. They can be tax-exempt in some situations. Liquidity account gives various options for cash management for different reasons and can provide money during emergencies (Salas-Molina et al., 2018).

Receivables Management

Receivables management can also be referred to as debtor management. Its objective is to help the firm avoid defaults in payment and ensure a business's long-term liquidity. It forms part of the internal accounting department and includes arranging, recording, and organizing outstanding payments. Accounts receivable is the cash owed to a business by its clients. The significant aim is to minimize the processing and Days Sales Outstanding (DSO) costs, even as it keeps good customer relations. It is the main current asset on the balance sheet. Management of goods receivables helps businesses avoid overdue payment or non-payment. Hence it is a fast way of strengthening a firm's liquidity or financial position. The overall aims of astute inventory management are to offer the necessary client service level, minimize inventory expenses, and allow cost-efficient operations. (Siekelova et al., 2017).

Inventory Management

Inventory management is the process of ordering, storing, and using (selling) a firm's inventory. It includes managing raw materials (components) and finished goods and storing and processing the items. It essentially means the right stock, at the correct levels, in the right place, at the right time, and at the right cost and price. The five common types of inventories include raw materials, work-in-progress, complete goods, packaging, and maintenance, repair, and operations supplies. Inventory management is vital to small firms as it aids in avoiding stock-outs of cash, managing multiple locations, and accuracy in recordkeeping. Knowing the kind of inventory to use is essential in making better financial decisions for its supply chain (Singh & Verma, 2018).

Finance Working Capital

Working capital refers to the amount of money a firm can safely spend. It is commonly referred to as the current assets minus current liabilities. It is measured based on cash or assets that can be easily turned into cash (e.g., debtors' invoices), and expenses incurred within a year (Altaf & Ahmad, 2019).

Working Capital = Current Assets – Current Liabilities.

Examples of working capital are trade credit done through the extension of payment terms, and factoring, which is the sales of the firm's accounts receivable at a discounted rate to allow access to the Capital. A short-term small business loan offers shorter terms than regular loans, going for less than two years, and maybe as short as 3 to twelve months. Finally, a business line of credit is also available as a source of working capital financing options (Altaf & Ahmad, 2019).

Conclusion

As MNCs continue to grow and expand, there has been hastened the need for powerful tools to help manage working capital. Here, Businesses have had to balance the trade-offs between their current assets' profitability and liquidity amidst the glaring business uncertainty. This complexity is compounded by other issues such as foreign rates, tax methods, foreign money funding, and the multifaceted political, social, and economic uncertainties. Therefore, financial managers must be well-versed in financial concepts such as operating and cash cycle, funds repositioning, cash and inventory, and receivables management, and finance working capital.

References

Ahmed, A. (2018). Working capital management of a multinational company: British American Tobacco Bangladesh Ltd.

Altaf, N., & Ahmad, F. (2019). Working capital financing, firm performance, and financial constraints. International Journal of Managerial Finance.

Ben-Nasr, H. (2016). State and foreign ownership and the value of working capital management. Journal of Corporate Finance, 41, 217-240.

Dehghanfard, K., & Moslemi, A. (2017). Inflation, Operating Cycle, Cash Holding. Advances in Mathematical Finance and Applications, 2(3), 79-90.

Klettner, A., Clarke, T., & Atherton, A. (2019). Multinational Corporations and their Subsidiaries.

Salas-Molina, F., Pla-Santamaria, D., & Rodriguez-Aguilar, J. A. (2018). A multi-objective approach to the cash management problem. Annals of Operations Research, 267(1-2), 515-529.

Siekelova, A., Kliestik, T., Svabova, L., Androniceanu, A., & Schonfeld, J. (2017). Receivables management: The importance of financial indicators in assessing the creditworthiness. Polish Journal of Management Studies, 15.

Singh, D., & Verma, A. (2018). Inventory management in the supply chain. Materials Today: Proceedings, 5(2), 3867-3872.