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As corporations increasing their global net, implementing netting and re-invoicing techniques is becoming a necessity. It saves the companies involved in transactions from different parts of the world, significant costs related to conversion of the currencies into their own. In case of small companies with just one or two subsidiaries in different nations, the transactions are simple, [link widoczny dla zalogowanych] even when they pay the parent in their local currencies. However, many companies are expanding their global presence and setting up subsidiaries across [link widoczny dla zalogowanych] the globe for marketing, selling, procuring of raw material and product development benefits.
These subsidiaries pay their parent and its other subsidiary transaction money in their local currencies, which the receiver converts to its own. The conversion entails significant wire exchange charges, which can reduce significantly by using netting and re-invoicing techniques.
Re-invoicing refers to the process of managing risks related to foreign currency by setting up of a [link widoczny dla zalogowanych] subsidiary. Such a process necessitates a [link widoczny dla zalogowanych] company to establish a subsidiary, so that it purchases goods from a subsidiary based in another country and resells the goods to another subsidiary that imports such goods. The payment in such a [link widoczny dla zalogowanych] case passes through a re-invoicing centre that manages the funds from both the units.
What is Re-Invoicing?
Besides re-invoicing, there is internal factoring technique that similar to that of [link widoczny dla zalogowanych] re-invoicing but buys the exporting unit's receivable account.
By implementing adequate netting mechanisms the companies [link widoczny dla zalogowanych] can also improve their cash flows, as the [link widoczny dla zalogowanych] mechanism necessitate proper planning of funds.
Both these netting forms [link widoczny dla zalogowanych] minimize the number and frequency of the transactions between the parent and its subsidiaries and enable better management of risks related to foreign currencies. Netting mechanisms facilitate the companies to use leading and lagging devices efficiently; these devices ensure payments before schedule (leading) or after schedule (lagging), ensuring smooth transactions. In the event [link widoczny dla zalogowanych] of currency depreciation (relative to the receiver's currency), leading yields benefits and in the event of its appreciation, lagging.
What is netting?
It is a tactics that multinational use to consolidate fund flows between its subsidiaries across the globe and itself to enable efficient cash management. There are two types of netting - Bilateral netting and multilateral netting.
Such a process enables better management of the foreign currency and reduces the parent company from fluctuation in the currency rates. The process also improves the company's liquidity profile by [link widoczny dla zalogowanych] using leading and lagging modes of payment. It is also efficient in getting the company economies of scale, as the company trades in large chunks of foreign funds and therefore obtains cheaper foreign [link widoczny dla zalogowanych] exchange rates.
Bilateral netting involves netting several transactions among two of the company's subsidiaries such that the net balance that is calculated and transferred periodically. Multilateral netting works similarly, however, involves multiple subsidiaries.
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