There are several definitions of the concept of “cash flow” in the current financial literature. The article begins by reviewing the most recent definitions of cash flow. An arrow…
Abstract
There are several definitions of the concept of “cash flow” in the current financial literature. The article begins by reviewing the most recent definitions of cash flow. An arrow diagram, showing the flows in and out of the pool of corporate cash, has also been developed. The article then proceeds to examine techniques for accelerating the cash flow cycle, in particular the problem of accounts receivable collection. Indeed, the usual transfer time of payments in Europe varies from four to eighteen days, depending on the country of origin and the method of payment. This means that funds are permanently lost in “float” somewhere in the banking system. The amount of “float” results in an actual loss of working capital for the company. This illustrates the importance of techniques to increase the cash turnover. We limit ourselves to the more important techniques. Finally, we define and examine in detail the phenomenon “float”, a crucial concept in cash management.
We have to define “cash flow”; it is variously defined in different contexts. Techniques of accelerating the flow are described.
A survey was conducted to gather information on current practices. In general large Belgian companies seem to be rather advanced in the development and application of an efficient…
Abstract
A survey was conducted to gather information on current practices. In general large Belgian companies seem to be rather advanced in the development and application of an efficient treasury management system. The relatively high sophistication of their practices may or may not be a sufficient condition for high efficiency.
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Robert Grant and Luc A. Soenen
Since the demise of the Bretton Woods System of quasi‐fixed exchange rates in the early seventies, unanticipated exchange rate movements are a fundamental feature of the…
Abstract
Since the demise of the Bretton Woods System of quasi‐fixed exchange rates in the early seventies, unanticipated exchange rate movements are a fundamental feature of the international economic environment. The ever increasing degree of exchange rates volatility has spurred the creation of new financing and hedging instruments and techniques. The proliferation of these financial innovations has confounded many treasurers as to the appropriate instrument or technique to be used in resolving a foreign exchange risk management problem. Notwithstanding the persistent and sophisticated nature of current foreign exchange risk management, there are situations where hedging does not protect the firm from large losses caused by unanticipated changes in exchange rates. We present three situations where hedging fails to protect the firm from risks arising from fluctuating exchange rates: first, where the firm has a continuous inflow of foreign currency; second, where foreign exchange risks are compounded by general and relative price risks; and third, where the perfectly hedged firm faces competition from unhedged rivals.
The traditional profit centre concept of Management has a fatal defect. It concentrates attention on near term reported profit rather than cash flow. The two are not equivalent…
Abstract
The traditional profit centre concept of Management has a fatal defect. It concentrates attention on near term reported profit rather than cash flow. The two are not equivalent. Both short term and long term, they tend to move in opposite directions. Near term investment depresses near term reported profit although it may increase profit markedly later. Near term divestment frequently appears as near term profit but also often leads to liquidation of the business in the long run.
Over the last 20 years, research has confirmed and reconfirmed the benefits of international diversification. [See Madura (1984) for a review of this research.] However, changes…
Abstract
Over the last 20 years, research has confirmed and reconfirmed the benefits of international diversification. [See Madura (1984) for a review of this research.] However, changes in international stock market and foreign exchange market behavior require that some issues be reassessed. First, how do potential gains from international diversification vary across perspectives? Most of the past research focused solely on a U.S. perspective. Solnik (1974) assessed various perspectives, but the period assessed was prior to the inception of floating exchange rates. Because of the high degree of integration of stock markets and the volatility of foreign exchange rales, a reassessment from various perspectives is necessary.
While economic exposure is an important issue for the management of a multinational financial system, few models have been developed to measure this risk. The major challenge to…
Abstract
While economic exposure is an important issue for the management of a multinational financial system, few models have been developed to measure this risk. The major challenge to measuring economic exposure is the interdependence of affiliate performances vis‐a‐vis changes in currency values. In this paper, a model has been developed that not only measures the sensitivity of the value of the firm to changes in currency values, but also recognizes the interdependence among the affiliates. The model takes a global view of the problem and also leads to guidelines for managing economic exposure. While the discussion focuses on geographically diversified multinational companies, the content of the paper is equally applicable to domestic companies.
Raj Aggarwal, J. Edward and Louise E. Mellen
Justifying new manufacturing technology is usually very difficult since the most important benefits are often strategic and difficult to quantify. Traditional capital budgeting…
Abstract
Justifying new manufacturing technology is usually very difficult since the most important benefits are often strategic and difficult to quantify. Traditional capital budgeting procedures that rely on return measures based on direct cost savings and incremental future cash flows do not normally capture the strategic benefits of higher quality, faster responses to wider ranges of customer needs, and the options for future growth made available by flexible manufacturing technology. Adding to these limitations is the difficulty of using traditional cost accounting systems to generate the information necessary for justifying new manufacturing investments. This paper reviews these problems and recommends procedures useful for assessing investments in flexible manufacturing technology.
The financial analysis of international investment decisions is complex. The basic methodology which homes in on incremental cash flows needs to be refined in order to focus upon…
Abstract
The financial analysis of international investment decisions is complex. The basic methodology which homes in on incremental cash flows needs to be refined in order to focus upon cash flows which are remittable to the parent company, for it is only these that would logically add shareholder value. Build in the complications of two lots of tax and changing exchange rates and the equation looks anything but simple. But there is another complexity too which renders the traditional discounting methodology less than wholly appropriate. And this applies not just to international investment but to any situation where capital is committed with an option to expand or curtail embedded in it. This is not to say that the typical model cannot be adapted to meet the situation. It can and it is not too difficult.
This paper contends that, contrary to conventional wisdom, it may be rational to manage translation exposure. Accounting procedures for the translation of foreign currency…
Abstract
This paper contends that, contrary to conventional wisdom, it may be rational to manage translation exposure. Accounting procedures for the translation of foreign currency accounts influence the reported income of a multi‐national firm. With non‐zero agency costs, reported income impacts real costs. In such cases, therefore, it may be rational to hedge translation exposure. Empirical evidence of agency costs and the managerial tendency to report higher levels of translated income, based on the early adoption of Financial Accounting Standard No. 52, is presented.