Controlling cash flows in a conglomerate
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Controlling cash flows ¡n a conglomerate A simple matrix representation helps to reconcile forecasts of intercompany payments
Alberto Canen and José Côrtes
This article presents a method to control the flow of payments among companies belonging to the same conglomerate of firms. lt also highlights the cash
payments flow, as well as the net intercompany position among the affiliates of the holding company. The holding company is assumed to act as a control for the activities of its affiliates, and all of them are assumed to be located in the same country.
management problem faced by companies' top management in countries of accelerating inflation.
The matrix of intercompany payments
Introduction Among the different problems that the top
This matrix is built through the data supplied for a
management of a holding company has to face, one offers special interest: the flow of payments among the
specific period by the affiliates of the holding company, which acts as a central control. Ideally, central control
should be based on perfect foresight of the flow of intercompany payments. Such payments can be summarised in a generic matrix of intercompany
companies belonging to the conglomerate of firms under its control.
payments whose format is presented in Figure 1.
The trend to a conglomerate diversification, observed in the growth process of large companies in all market economies, increases the need for better forecasts and control of money flows as part of the general problem of cash management.
Figure 1: Matrix of intercompany payments Paying affiliates
Receiving affiliates
As cash management becomes ever more technical,
Ai
Aj ... An
managers become increasingly worried about the difficulties posed by the optimIzation of the net cash
Ai Ai
aij
accelerating inflation, as happens now in several
Total payments (Il)
tp
balances required for the regular functioning of business operations. This concern is greater in conditions of countries around the world.
Total receipts (I) t
Net intercompany
position NIP = l-Il
Cash balances must be kept by companies to
accommodate foreseeable differences between cash inflows and outflows in some specified time horizon.
nj
Figure 1 shows n affiliates denoted by Ai, A2 ... , An; aij represents the amount received by affiliate A from
Obviously, all measures that reduce the uncertainty orthe
disparity of cash flow will reduce the magnitude of the
affiliate Aj. In this connection, it is important to notice that:
monetary asset required, leaving more cash available for investment, with a greater return.
Ajj = O for all i = 1, 2,
... , n;
the holding company can be an element in the
The vast literature on cash management is quite poor on the subject of forecast and control of intercompany flow of payments in a conglomerate. Srinivasan and Kim (1986) review the state of the art of Deterministic Cash
matrix;
the matrix is filled with expected values of future
Flow Management, showing that other topics have
receipts and payments, i.e. with the final outco
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