In order to reduce the ‘float’ several techniques are used, for instance, telex, Swift
network, or lock-box. In the lock-box system, payments are directly addressed to a postal
box and collected each day by the bank, thus eliminating the postal as well as processing
time periods required before depositing the cheques in the bank. Lastly, the treasurer
limits the number of banks intervening in the banking circuit and addresses himself to
banks, having an international network and likely to make the transfer at the earliest.
Centralization of treasury generally permits to improve the management of foreign
currency flows. In selecting a technique, the finance manager should be guided by the
cost involved and benefits it has in terms of simplicity and speed of recovery.
- Different Flows of Treasury
Given below are principal flows of cash between the group and foreign subsidiary. These
flows can be expressed in the national currency or in foreign currencies.
(a) Flow of funds of the Group towards the foreign subsidiary is:
- Participation in the capital of the subsidiary;
- Medium and long-term lendings;
- Cash advances;
- Payment for goods when the parent company buys the products of the subsidiary.
(b) Flows of funds of the subsidiary towards the Group are:
- Dividends;
- Rents on patents, licenses, brands (royalties). The royalties may either be
calculated as a percentage of net sales or represent a fixed amount per unit sold.
In certain countries, the royalties are limited to a certain percentage of sales; - Payments of honorarium for services and technical assistance; they are considered
as a fixed charge for specific services rendered during a determined period; - Payment for goods and services: these payments for goods and services between
the foreign subsidiary and the parent company pose the problem of transfer prices,
etc.
In multinational groups, it is the dividends that represent the most significant flows.
On an average, foreign subsidiaries of multinationals pay to the parent company 40 to 50
per cent of their profits and reinvest the remaining 50 to 60 per cent in the host country.
- Optimization of Cash Flows
Complexity of the flows of treasury often necessitates centralization of cash management
- Either at the group level;
- Or at the level of holding;
- Or at the level of the regional centre.
The regional centre will be located preferably in a country of lower tax rates and without
exchange regulations such as Luxembourg, Bahamas, Switzerland and West Indies, etc.