12.16 Techniques for global money management
Two techniques are considered: centralised depositories and multilateral netting. They are both relatively simple concepts and they are described simply here. However, it is essential that you read the example on pages 680-681 of your textbook that examine the effect of pooling a corporation's cash reserves. It is covered by the next reading.
According to Grosse and Kujawa (1995, p. 405) centralised depositories f or centralised cash management offer five advantages to an MNE:
- By pooling the cash holdings of affiliates where possible, it can hold a smaller total amount of cash, thus reducing its financing needs.
- By centralising cash management, it can have one group of people specialise in the performance of this task, thus achieving better decisions and economies of scale.
- By reducing the amount of cash in any affiliate, it can reduce political risks as well as financial costs.
- It can net out intracompany accounts when there are multiple payables and receivables among affiliates, thus reducing the amount of money actually transferred among affiliates.
- Its central cash management group can ensure that cash management decisions aim at corporate goals rather than the goals of individual affiliates, when these might conflict.
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