Amount Of Charge Flowing Through A Wire Each Second Cash Management: The Global Need For Netting And Re-Invoicing

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Cash Management: The Global Need For Netting And Re-Invoicing

As corporations expand their global networks, implementing netting and re-invoicing techniques is becoming a necessity. This saves companies engaged in transactions in different parts of the world, significant costs associated with converting currencies into their own.

In the case of small companies with only one or two subsidiaries in different countries, transactions are easier even if they pay the parent in their local currency. However, many companies are expanding their global presence and setting up subsidiaries around the world for marketing, sales, procurement of raw materials and product development benefits.

These subsidiaries pay their parent and other subsidiaries transactions in their local currencies, which the recipient converts into its own currency. Conversion involves significant wire exchange fees, which can be significantly reduced by using netting and re-invoicing techniques.

What is netting?

This is a tactic used by multinationals themselves to consolidate fund flows among its worldwide subsidiaries and enable efficient cash management. There are two types of lattices – bilateral lattices and multilateral lattices.

Bilateral netting involves the netting of multiple transactions between two subsidiaries of a company such as net balances that are calculated and transferred periodically. Multilateral netting works similarly, however, involving many subsidiaries.

Both these netting forms reduce the number and frequency of transactions between the parent and its subsidiaries and enable better management of risks associated with foreign currencies. Netting systems help companies use leading and trailing equipment efficiently; These devices ensure payments ahead of schedule (leading) or behind schedule (lagging), ensuring smooth transactions. If the currency depreciates (relative to the recipient’s currency), the leading income gains and if it appreciates, the lagging.

Companies can improve their cash flow by implementing adequate netting mechanisms, as the mechanism requires proper planning of funds.

What is re-invoicing?

Re-invoicing is the process of managing foreign exchange risk by setting up a subsidiary. Such a process requires a company to set up a subsidiary so that it purchases goods from a subsidiary located in another country and resells the goods to another subsidiary that imports such goods. Payment in such cases goes through the re-invoicing center which manages the funds of both the units.

Such a process enables better management of foreign exchange and insulates the parent company from exchange rate fluctuations. This process improves the company’s liquidity profile using leading and lagging payment methods. It is also efficient in gaining economy of scale for the company as the company trades largely in foreign funds and thus gets cheap foreign exchange rates.

In addition to re-invoicing, there is an internal factoring technique which is similar to re-invoicing but purchases the accounts receivable of the exporting unit.

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