Ask FERF about ... FELIX PC.

FELIX PC, the acronym for Financial Executives List Exchange for Private Companies, is a "moderated," email-based discussion forum that allows FEI members to communicate with and learn from their peers. Recognizing their unique needs, FELIX was created as a special service for FEI members from private companies; it is moderated by researchers from Financial Executives Research Foundation (FERF).

FELIX subscribers submit questions to the FELIX PC moderator, who compiles and edits the questions for distribution to all subscribers. Other subscribers then respond, based on their own experience and expertise. Both the member asking the question and the member responding may use their name and email address, to foster other networking opportunities, or they may remain anonymous.

Many FEI members say that the primary benefit of FEI is the opportunity for networking, and FELIX PC essentially offers virtual networking. During the 2006 fiscal year (July 1, 2005 to June 30, 2006), FELIX PC subscribers submitted a total of 83 individual questions to the FELIX PC moderator, and, after distribution, 47 of those questions were answered with one or more thoughtful responses from other members.

To offer a sample, here are two recent questions and two respective responses:

Financing for Venture in China

Question: My company is considering building a manufacturing plant in China. We are already fully leveraged, so we do not have much excess borrowing capacity to borrow against our domestic assets. Does anyone know of the possibilities of borrowing locally in China against Chinese assets? (Lance J. Koved)

Response: My experience is that it is very difficult. In general, banks will not finance machinery and equipment unless you own your real estate. Banks will not generally finance real estate unless you provide a letter of credit or guarantee from your U.S. bank. The legal system does not really support a bank's ability to perfect a claim on collateral.

If you can get the local government to be your advocate and use a "guarantee" company, you may be able to obtain financing locally, though the guarantee fee may increase your borrowing rate by 2 or 3 percent.

We have really struggled with this issue and not found a great solution for it. The real question is, "How do medium-sized manufacturing concerns in the U.S. finance global operations using a traditional U.S.-based collateral base?" (Christopher Giles)

Policy for Cash Remittance From Foreign Subsidiaries

Question: Does anyone have a cash management policy for bringing cash back to the U.S. from a 100 percent-owned foreign subsidiary? Specifically, do you state the frequency that excess cash should be transferred back to the U.S., and is it stated in terms of number of months of cash flow or some other measure? (Anonymous)

Response: The policy for cash remittance from foreign subsidiaries depends on several variables including:

* Sophistication of foreign staff. A country with a less sophisticated financial staff requires higher foreign balances because cash forecasting is more difficult and less accurate.

* Opportunity cost--the higher your interest rate, or if you have already used much of your own credit line, the tighter you must run foreign operations.

* Predictability of foreign cash flows The less predictable, the more cushion you tend to keep to reduce the likelihood of emergency funds transfers.

* Amount of cash in the subsidiary. Spending significant effort to manage small sums does not make sense.

* Frictional costs of moving money to and from the subsidiary. The more effort and cost involved, the higher local balances should be kept.

If you run cash balances too tight, you risk bouncing payroll checks and impacting employee retention, or even supplier product flows. If you run cash balances too loose, you risk opportunity costs and the potential loss as a result of less than desired levels of controls.

We use an inventory concept, wherein we try to keep a "safety stock" of about two weeks of cash. In other words, we don't let the cash balances of our foreign subsidiaries get below two weeks of cash requirements. (Bill Koch)

If you would like to subscribe to FELIX PC, just send an e-mail to [e-mail]. FELIX PC is an FEI member benefit, and there is no additional charge.

William M. Sinnett ([e-mail]) is Director of Research at Financial Executives Research Foundation (FERF).

contributed by FERF