Cash pooling, Centralized cash management

The cash pool (or cash pooling) it is a centralized cash management strategy that pursues the objective of balance the accounts of the subsidiaries of a group. Its ultimate goal is to optimize the condition and management of the treasury by overcoming the imperfections of financial markets with lower financial costs.

In the case of a large group consisting of a powerful holding company and weaker subsidiaries, the effective combination of cash may allow access to financial markets.

Cash Funds Processing

Centralized cash management is done by loading the balances of the bank accounts of the subsidiaries in the centralizing account.

In this way, the CFO of the company can have a much more complete view of cash and liquidity in the group and know precisely the state of the treasury of its subsidiaries.

The centralizing account of the holding is a unique account designed to centralize every day all the account balances of the company’s subsidiaries and unifies the cash flow of the different accounts to improve the overall management.

The cash pooling it can be done by:

  • Transfer funds to accounts with negative balance, so that there is no higher interest expense.
  • Transfer funds to an account, to reap dividends from the creditor balance.

In this way, the number of overdraft charges is reduced to one (the dynamic account), which dramatically reduces outgoing flows.

The bank can prepare a detailed report of all cash flows and interest within the group generated by the different accounts, following the previously defined bank contract between the institution and the group.

Types Cash Pooling

Depending on the group’s strategy, cash pooling can take several forms, provided that a framework and conditions have been previously defined with the bank, which draws the different hierarchical levels and roles of each account so that the bank can organize centralization into one or more account levels.

In general, one can distinguish between the notional cash pool and other types of cash pool, such as zero balance, one of the most prominent.

We will know both approaches a little more thoroughly:

  • Notional Cash Pooling. The notional cash pool, by merging the interest statements, leads to the achievement of a result similar to that of the standard cash pool, that is, an automatic cash centralization. Opting for this approach implies that all group accounts operate independently and manage their own lines of credit. With the notional cash pool, you can combine the accounts of each subsidiary, without raising cash or losing paperwork. The main advantage of this method is that each constituent entity of the company remains independent within the group.
  • Zero balance of cash funds. This type of cash pool requires a domain of accounts and a zero balance account. The cash pooling “zero balance” allows centralizing all the cash flows of the group in a single account, and then viewing and verifying all the treasury conditions of each subsidiary and the parent company. To achieve this, the group will ask its bank to set up internal accounts, which will be merged into the main account. In this case, both partners need to review their agreements on credit lines.

The cash pooling It is associated with important advantages. Its benefits include the simplification of cash management through the centralization of the balance, the decrease in bank fees and financial costs and, no less relevant, the optimization of the control of the coffers of the subsidiaries.