International cash management best practices
The success or failure of a company often comes down to one thing: cash.
However, high interest rates and economic uncertainty have made it increasingly difficult for companies to achieve their short- and long-term financing needs. And without financing, it’s hard for companies to expand and compete on the global stage.
To operate internationally, organizations need sound cash management practices. That means looking beyond the traditional practices of debt service, receivables collection, vendor disbursements and forecasting.
While these practices are instrumental to sound cash management, adopting policies that are not traditionally used in domestic cash management could give your company an extra edge.
Consider these alternate approaches:
Centralized cash management can alleviate the challenges of cross-border transactions
Managing cash across borders with numerous bank accounts and currencies can be a challenging undertaking. One way to alleviate some of this strife is to implement a centralized cash management system. Centralized cash management systems handle cash more efficiently and produce a greater rate of return on cash investments.
Under a centralized system, each subsidiary forecasts cash demands for its own subsidiary. The parent company controls and distributes cash around the organization to meet required working capital needs or to maximize investment returns.
Cash savings can help increase ROI
Cash savings are produced in several ways. For example, if the parent company foresees that Subsidiary A will have a $100,000 shortfall of cash this month, but Subsidiary B will have a $125,000 surplus, it can move cash from one subsidiary to the other. As a result, Subsidiary A can avoid a financing arrangement with an outside financial institution.
In addition, cash can be pooled from multiple locations to help maximize the rate of return on an investment. If excess cash is not being used for operations, it could be consolidated into one account with the most advantageous interest rate. Then, the company can earn a higher rate of return by having a larger balance and the maximum interest rate.
Companies that operate with multiple currencies can also maintain separate accounts of foreign currencies and distribute them to subsidiaries when in demand, reducing periodic translation costs.
A netting policy can reduce clerical and transaction costs
The objective of a netting policy is to accumulate two or more companies’ transactions, whether through collections or payments, for an extended period of time and to aggregate transactions into batches.
Accumulating balances over a period of time reduces the quantity of transactions that occur between companies. Instead of collecting or paying on multiple transactions a month, a single aggregated transaction can occur.
Reducing the number of transactions yields several potential benefits:
- Overall administrative and banking charges can be reduced, which frees up company resources and reduces cash transfer fees.
- For international transactions, costs associated with translation expenses could be reduced.
- The company can hedge against currency losses connected with translation and reduce its normal banking fees.
- Netting can improve control over a company’s cash position.
- With fewer transactions, it’s easier to monitor and predict cash inflows and outflows.
Restriction of funds: Getting money in and out of restricted areas
Countries such as Brazil and China have strong currency control measures. Foreign governments may mandate that profits generated within their borders be reinvested into the local economy to help stimulate economic growth or recovery. You need to understand these controls to effectively manage cash and provide enough capital to keep the business strong.
Some countries, such as China, restrict money as it enters and exits the country. Generally, only approved paid-in capital can be remitted to certain bank accounts, and only reasonable amounts are allowed to be converted to the local currency. However, companies that import and export goods out of China are allowed to pay and receive funds in Chinese currency. Select companies are permitted to open non-resident bank accounts.
Due to the constant flux in currency regulations and restrictions, it’s imperative to talk to an experienced professional before implementing any new policies.
Intercompany transfers can be a tool to manage cash and earnings
You can also leverage an international parent-subsidiary relationship to help manage cash and earnings and facilitate tax planning. The most familiar method is through intercompany agreements for services or products.
Transfer pricing, put simply, is moving goods and services across borders to related companies. Transactions must be performed at arm’s length, meaning that prices would be the same for any other company on the open market.
Transfer pricing can be an effective tool to:
- Help shift income between tax jurisdictions.
- Lower tax liabilities.
- Counter blocked funds.
A note of caution, though — Many government agencies aggressively examine companies’ records and are diligent about enforcing regulations. Penalties for violating international transfer pricing regulations can be harsh, so it’s important to properly analyze transfer pricing ahead of any implementation.
In addition, consider service taxes and other withholding tax before setting up intercompany transactions. For example, service providers may be subject to a 5% service tax if clients are in China, even if services are provided in the United States.
Free up cash through leading and lagging
Leading and lagging is another tactic available via intercompany relationships. Under this approach, subsidiaries can pay for supplies from the parent company in advance, known as leading, or the parent can lend supplies to its subsidiaries without requiring payment straightaway, known as lagging. Leading and lagging can help free up additional cash to service debt or fund other operational requirements.
How Wipfli can help
Foreign governments and banking systems can be tricky to navigate — but worth the effort. If you need support with international cash management to achieve your long-term or global expansion goals, we can help. Contact us today to learn more.
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