Forex: The Money Management Principle
Certain basic principles of money management must be expressed and then related to foreign exchange. The first principle is that the possible earnings or savings from money management must exceed the cost of the management.
No matter how advantageous a particular system may be it makes no sense to install it if the overall effect is to spend $20,000 to save $10,000. The key is volume. Potential savings as expressed in percents are always very small, so transactions must be substantial in both number and size to make proper money management worthwhile. The principal expense is in obtaining or developing an individual who is capable of handling the function.
Alternatively, a number of banks offer services in the area. Application of foreign exchange techniques requires expert knowledge and judgment and is usually impossible on a routine basis.
Second, money has a time value; in fact, money is never idle and is always earning for someone somewhere. What the money manager aims at is to have funds available to earn interest as soon as possible as long as possible. To repeat a simple example, a check mailed to a debtor is not charged to the drawer's account until it is deposited by the payee and clears through the banking system.
That may take several days, during which the drawer's bank earns interest on the funds, since the withdrawn funds are included in the bank's position. In a like manner funds used in foreign exchange earn interest daily for someone somewhere.
Principal considerations of the money manager--- the decision having been made that there is enough money around to need managing and that the expense of managing it is warranted, the first consideration is to cut down or eliminate the time funds are in transit. The way in which that is done depends on whether the recipient or the payor controls the transaction.
An examination of the system and, what is particularly important, its interaction with the system in the home country will indicate the best way to go about making collections. That, of course, will take time and expertise and a large amount of detailed information.
When both sides of the transaction are under common control, both the timing of the payments and the method of conversion can be arranged to maximize the advantages. It is essential to have a clear understanding of just how the banking systems in the countries involved work. That understanding must include knowledge of facilities for short-term investment and borrowing and foreign exchange procedures.