Cash Pooling

The cash pooling (or cashpooling) is a centralized cash management strategy to balance the accounts of a group’s subsidiaries. The final goal is to optimize the condition and the management of the treasury by overcoming the imperfections of the financial markets with less financial costs.

 

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

 

Cash pooling can be distinguished between notional cash pooling and other kinds of cash pooling. The notional cash pooling, by merging the interest statements, leads to the achievement of a similar result as the standard cash pooling, that is to say an automatic cash centralization.

 

Among the benefits of cash pooling strategy can be mentioned:

 

• simplification of cash management through balance centralization
• decrease of bank fees and financial costs
• optimization of the control of the subsidiaries’ treasuries

Cash Pooling Processing

The centralized cash management is performed by the load of the subsidiaries’ bank account balances to the centralizing account of the holding. The company’s CFO can thus have a 360 degree view of cash and liquidity in the group and know precisely the status of the treasury of their subsidiaries.

 

The state of the accounts and the company’s strategy will come out of a number of financial decisions (investment, investments, consolidations…) that have a direct impact on the holding company and its entities.

 

The centralizing account of the holding:

 

• is a unique account designed to centralize every day all the account balances of the company’s subsidiaries
• centralizes the cash flow of the various accounts to improve the global management

This centralization can be made by:

 

• transferring funds to accounts with negative balance, so that there is no higher interest expense
• transferring funds to one account, in order to reap the dividends of the credit balance

In this way, the number of overdraft charges is reduced to a single one (the pivot account), which drastically lowers outgoing flows.

 

The bank can draw a detailed report of all intra-group cash flow and interest generated by the various accounts, following the previously defined banking contract between the institution and the group.

Different Types of Cash Pooling

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

Notional Cash Pooling

Simplified version of cash pool, the notional cashpooling implies that all accounts of the group operate independently and manages its own credit lines.

 

This type of cash pooling will then merge the accounts of each subsidiary, without raising cash or paperwork.

 

The main advantage of this method is that each constituent entity of the company remains independent within the group.

Zero Balance Cash Pooling

This type of cash pooling requires a mastery of his accounts (and a ZBA – Zero Balance Account). The “zero balance” cash pooling enables to centralize all the cash flows of the group on a single account, then to view and check all treasury conditions of each subsidiary and the parent company.

 

To do this, the group will ask his bank to set up internal accounts. These accounts will then be synthetically merged in the main account. In this case, both counterparts will review their agreements on credit lines.