19 Dec 2016

International Cash Pooling

Cash Pooling is a cash management technique employed by financial institution, namely holding companies to concentrate – materially or virtually – their cash flows in a sole fund, to better manage the company’s economic resource.

Cash pooling indeed allows companies to combine their credit and debit positions of different accounts into one and includes techniques like notional cash pooling and cash concentration. Notional cash pooling is the mechanism through which companies put together different balances in order to avoid low balance or transaction fees. It is a tool for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds between the accounts.

Cash concentration or zero balancing occurs when the company physically centralize various accounts into a single one single. It implies the aggregation of the cash in multiple bank accounts into a single master account. This is done so that the funds can be more efficiently invested or used for payments from a centralized account. With this operation indeed companies plan to optimize financial resources, to reduce the cost of financial resources, to achieve economies of scale and a more sophisticated treasury management.
We can distinguish two main types of Cash Pooling:

  • Financial Cash Pooling: it consists in the management of liquidity, financial risks (type of exchange rate or interest rate), optimization of cash surpluses and the negotiation of bank conditions.
  • Operating Cash Pooling: it consists in the planning, forecasting and realizing of receipts and payments, and control of banking conditions.

What is the international cash pooling?

We talk about international Cash Pooling when the above described process affects more than a country or different currencies. It is a complex processes, due to the fact that tax law regime varies from country to country and moreover since it is difficult to find banks owing subsidiaries in all EU countries.

Modalities of International Cash Pooling

  • International Cash Pooling with transfers: this system is based on sending or receiving account balances to or from abroad through automatic transfers. It plays a very important role for communications and computer systems to carry out such operations.
  • Conceptual International Cash Pooling: it a technique where no movement of funds occurs.  In this case, the balance among the subsidiaries’ accounts is achieved by netting positions instead of transferring the surpluses to a master account. Interest rates are set indipendently for each of the involved accounts depending on its balance.
  • Joint International Cash Pooling: the system offsets credit balances in one currency against debit balances in another currency. It is a cross-currency interest system managed per account on a daily basis. However, unlike physical cash pooling, this does not require the physical conversion of currencies and movement of funds once the balances are concentrated in the header accounts. The funds remain in the name of the different legal entities, thus eliminating inter-company loans and the associated administratrative burden.

Consequences arising from international cash pooling, locally:

International cash pooling may have a quite relevant also locally such as on:

  • Local finance: International Cash Pooling may have a good effect of local finance, in addition to performing functions of collection and payment process, risk management, management of interest rate, currency risk, seeking optimize capital as opposed to the traditional cash management;
  • Financial entities: it allows companies to use customer data globally, providing tailored services to enhance the use of capital.

Advantages of cash pooling

  • In groups of companies it allows to operate financially with a less need for cash, avoiding hidden balances or speculative purposes, since excess of liquidity got to be absorbed and eliminated.
  • Concentration of information: corporate-global leaders can better identify opportunities or problems that those responsible for subsidiaries may not be able to perceive due to their partial vision of financial management.
  • The group’s subsidiaries can obtain more attractive banking conditions (eg. better interest rates for both assets and liabilities) than they would on their own.
  • Better internal control and greater security in decision making.

Disadvantages of Cash Pooling

  • Need for more structured the financial departments.
  • More complex financial operations (it multiplies the number of banking notes).
  • Higher costs deriving from computer systems management and higher bank charges.
  • Problems in peripheral available accounts having zero balances, which could be solved with the establishment of conditional orders.
  • Possible legal and tax problems.

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