Cash Pool Summary
A cash pool is a very useful tool to fully unlock the benefits of bank account rationalization and/or to enable in house banking. Without bank rationalization or in house banking in place a cash pool has the stand alone benefits as displayed in the picture.
Due to its variety in possible setups and scalability it is a very popular instrument to effectively manage cash and liquidity when cash volumes are getting bigger in organizations.
Contact us for more information on cash pool setup options for your organization.
What is cash pooling?
Cash pooling is the aggregation of the balances on various separate bank accounts in a single banking structure. By aggregating the balances in the banking structure interest is optimized because the bank will look at the pooled balance and not the individual balances. The pooling of balances will also increase liquidity available to an organization because the full pooled balance is centrally available opposed to being on separate accounts.
A cash pool setup can comprise of bank accounts
- of various legal entities
- in various jurisdictions
- in various currencies
thereby allowing an international group to consolidate all cash across the entire group.
Cash pooling comes in various forms. The greatest distinction is between physical and notional pooling. The first entails physically transferring cash in the cash pools. The latter is a system of offsetting the balances without moving the cash around. The other systems are variations or combinations of physical and notional pooling.
All cash pools depicted are possible including various subsidiaries which reside in various countries and can have differing currencies. In the cash pools in each of the examples the EUR are pooled and the GBP are not. The GBP are included in the example of the multicurrency notional cash pool. This also illustrates that it is possible to choose which accounts take part in the cash pool and which are not. This is a choice that needs to be made per individual account.
By using cash pooling the organization will save on bank interest charges and increases liquidity available to the group. The latter will reduce the external funding needs and decreases interest cost on that end as well. With a cash pool it is also no longer needed to negotiate overdraft credit lines for each subsidiary but instead have one overdraft facility supporting the cash pool.
In practice there is always a kind of a mixture when implementing a cash pooling solution. In most cases a solution involving a mixture of the various pooling options exists. This is always a tailor-made solution which depends on amongst others the organizations legal setup, its culture and its business model.
Treasury Improvement looks at all these factors of the organization and based on that proposes a setup that is tailored to best fit the company.
Tax and Legal implications
Setting up a cash pool in an international organization brings with it certain tax and legal implications based on amongst others the jurisdictions in which the various entities are located. Some of the items that need to be clarified are for example thin capitalization rules which may have an impact, currency controls in certain jurisdictions or limitations in intercompany setups between blacklisted countries or it may simply not be allowed to exercise cash pooling in some jurisdictions.
In any case proper intercompany documentation must be setup when setting up a notional cash pool to document the relationship and the nature of the cash pooling which should at minimum include at arm’s length pricing.
Physical cash pool
Notional cash pool
Single legal account cash pool
Reference account cash pool
Multicurrency notional cash pool
Cash pools improve your cash management practices, reduce interest costs, increase efficiency of your resources and increase overall liquidity.
Implementing a cash pool nevertheless is a sizable project due to the various internal and external stakeholders involved and the (legal) documentation that needs to be prepared. Treasury Improvement has the experience to make each cash pool implementation project a success.
Contact us for an assessment of your situation. Based on your unique situation we propose a tailor-made setup and implement that with you.
Enhancing your Treasury with setting up the proper cash pooling will have benefits of its own but also is the closing chapter of the bank account rationalization. If combined with an in house bank setup the cash management side of your Treasury is ready. The three combine nicely and work in tandem to achieve the best cash management experience possible.