BUS 553 Module 8 Multinational Working Capital Example

Twenty Wire Transfers a Month Down to Five: Netting, Pooling and Trapped Cash at an Adhesives Maker With Five Foreign Subsidiaries

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MBA Program, Aspen University

BUS 553: Global Corporate Finance

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Month Day, Year

Twenty Wire Transfers a Month Down to Five: Netting, Pooling and Trapped Cash at an Adhesives Maker With Five Foreign Subsidiaries

Buckeye Bond Adhesives, a composite company in Akron, Ohio, makes industrial adhesives and sealants for automotive, packaging and construction customers. It has $620 million in annual sales and subsidiaries in Canada, Germany, Mexico, Brazil and China, each with its own bank accounts, managers and finance staff. Subsidiaries buy materials from each other and from the parent, so intercompany invoices cross borders constantly. Each subsidiary manages its own cash, and some hold surpluses while others borrow on local overdrafts. The new treasurer has proposed reorganizing cash and working capital management. This paper evaluates the proposal.

Current Flows

In a typical month, about $38 million moves among the six entities through about 20 intercompany invoices, each settled separately with its own foreign exchange conversion and bank transfer. Banks charge spreads on each conversion, typically 0.15% to 0.4% depending on the currency, plus wire fees. Meanwhile, the German subsidiary holds about $14 million in surplus euros earning little interest, while the U.S. parent draws on its credit line at about 7%.

Multilateral Netting

Shapiro (2013) describes multilateral netting as a system in which all intercompany payables and receivables are reported to a netting center, which calculates each entity's net position and instructs it to pay or receive only that amount. Instead of 20 separate payments, each subsidiary makes or receives one net payment a month. Under the proposal, an Ohio netting center would net the monthly flows, reducing gross intercompany settlements of $38 million to net payments of about $11 million in five conversions. With fewer and smaller conversions at better rates, the treasurer estimates savings of about $410,000 a year in spreads and fees.

Cash Pooling

A cash pool combines balances so that one entity's surplus offsets another's deficit. A notional pool, offered by a bank across the United States, Canada and Germany, would treat the parent's overdraft and the German surplus as if combined for interest purposes, without moving money. Offsetting the German surplus against the U.S. borrowing would save about $650,000 a year in net interest. Mexico, Brazil and China cannot join because of local rules on cross-border cash movements, so they will be managed separately.

Leading and Lagging

Leading means paying an intercompany invoice early; lagging means paying late. A treasury can use these to move liquidity toward subsidiaries that need it or away from currencies expected to weaken. Buckeye's policy will allow intercompany terms to vary between 15 and 60 days, approved by the treasurer, but will not use leading and lagging to shift taxable income, which tax authorities scrutinize.

Why Cash Accumulates Abroad

Buckeye's German surplus reflects a broader pattern. Foley et al. (2007) found that U.S. multinationals facing higher tax costs of repatriating foreign earnings held more cash abroad, especially in affiliates where repatriation would trigger high taxes. U.S. tax changes in 2017 reduced the tax cost of bringing earnings home, but foreign withholding taxes and local rules still matter. More broadly, Bates et al. (2009) documented a large increase in the cash held by U.S. firms between 1980 and 2006 and attributed it mainly to precautionary motives: firms with riskier cash flows held more. For Buckeye, part of the German balance is precautionary, and part reflects habit and decentralized control.

Trapped Cash in Brazil and China

Brazil and China impose rules that make moving cash out slower and costlier. Brazil taxes certain foreign exchange transactions, and China requires documentation and approvals for many outbound payments. Buckeye will treat these subsidiaries' surpluses as locally available rather than group cash, use them to fund local growth and plan dividends annually with tax advisers, and avoid lending into either subsidiary in ways that would be hard to recover.

Transfer Pricing

Intercompany prices for materials and services must meet arm's-length standards in each country. The netting system will make intercompany flows more visible to auditors and tax authorities, which is an advantage: documented, consistent transfer prices reduce the risk of disputes.

Working Capital Beyond Cash

Cash management is only part of working capital. Each subsidiary also sets its own customer terms and inventory levels. The Mexican subsidiary allows automotive customers 90 days, while the German one collects in 45; China holds four months of raw material inventory because of past supply disruptions. The treasurer proposes group-wide targets for days of receivables and inventory by business line, reviewed monthly, with local exceptions approved centrally. Bringing Mexico's terms to 60 days and China's inventory to three months would release about $9 million of cash across the group.

Systems and People

The plan depends on information. Buckeye will connect each subsidiary's accounting system to a treasury platform that collects intercompany invoices and bank balances daily. Local finance managers will remain responsible for their entities' operations, but decisions on intercompany payments, currency conversion and surplus cash will move to Ohio. Clear roles prevent the confusion that can arise when local managers and a central treasury both believe they control the same cash.

Savings and Costs

Recommendation

Taking the savings, constraints and staffing together, Buckeye should centralize treasury in Ohio, implement monthly multilateral netting for all six entities, establish a notional cash pool for the United States, Canada and Germany, adopt intercompany payment terms with limited flexibility approved by the treasurer, and manage Brazil and China cash locally with annual dividend planning.

Measuring Success

The treasurer will report quarterly on four measures: the number and cost of currency conversions, average idle balances by entity, net interest expense and days of receivables and inventory against the new targets. After one year, the board will compare actual savings with the estimates above and decide whether to extend netting to suppliers that invoice in several currencies.

Conclusion

Decentralized cash management left Buckeye paying for 20 conversions a month and borrowing in Ohio while euros sat idle in Germany. Netting, pooling and disciplined intercompany terms, applied within the limits of currency controls and tax rules, would save about $760,000 a year and give the treasurer a clear view of the group's cash.

References

Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do U.S. firms hold so much more cash than they used to? Journal of Finance, 64(5), 1985-2021. https://doi.org/10.1111/j.1540-6261.2009.01492.x

Foley, C. F., Hartzell, J. C., Titman, S., & Twite, G. (2007). Why do firms hold so much cash? A tax-based explanation. Journal of Financial Economics, 86(3), 579-607. https://doi.org/10.1016/j.jfineco.2006.11.006

Shapiro, A. C. (2013). Multinational financial management (10th ed.). Wiley.