Cash Pooling Process

Cash is King

In short, cash pooling process maximises ‘Cash Position’ and helps to optimise the use of the surplus funds of all the subsidiaries.

Advantages of Cash Pooling

  1. It eases treasury management and avoids the negative interest rates payment. Surplus cash in one account is used to balance out the overdraft. This was any interest paid for the overdraft is avoided.
  2. Helps Company Self Finance. The excess cash in Concentration Account is used for Inter-Group funding. This helps subsidiaries get loan easily and with minimum interests.
  3. Cash Pooling enables centralised liquidity management.

Techniques of Cash Pooling

There are mainly 2 different types to pool cash: Physical Cash Pooling and Notional Cash Pooling. Physical Cash Pooling is further divided into different types based on the business requirement.

Cash Poolling example
Cash Pooling example

Physical Cash Pooling

In Physical Cash Pooling, actual transactions are done between the subsidiary and parent bank accounts. It is done in order to manage liquidity centrally. The excess amount, in subsidiary Bank accounts, is transferred to the concentration account. Whereas, Bank Accounts with deficit balance receives money from the concentration account.

In Physical Cash Pooling, bank accounts maintained in the same currency are grouped together.

Depending on the business requirement, physical cash pooling can be done in two different ways.

  1. Zero Balancing: Zero balance is maintained for the Subsidiary account at the end of the day.
  2. Target Balancing: A target balance is maintained for the Subsidiary account at the end of the day.

ZERO BALANCING

In this process, all the subsidiary accounts with a surplus fund disperse their fund to the concentration account, at the close of each business day. This process is called Sweeping. Whereas, all subsidiary accounts with deficit balance receives funding from the concentration account. This process is called toppings. These transactions are done to set the balances of subsidiary accounts at ZERO.

TARGET BALANCING

Target Balancing is similar to Zero Balancing, with one difference. Here, a pre-agreed bank balance is maintained at the closure of each business day. This pre-agreed fund is maintained for running daily business operations. The surplus balances are transferred to concentration account. Whereas, the deficit balance account receives fund, just like the zero balancing process.

Notional Cash Pooling

Contrary to Physical Cash Pooling, no transactions between bank accounts are performed in Notional Cash Pooling Process. It is a structure which involves several related bank accounts. The balances of these bank accounts are aggregated( without actual fund movement between accounts) and netted against each other. The Closing balance is calculated as the notional sum of all the individual participating bank accounts. A bank looks only at the total balance of the accounts in the notional pool when calculating interest.

We can include bank accounts maintained in multiple currencies under Notional Cash Pooling.

Implementation of Cash Pooling is a tailor-made solution.

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