Cashpooling

Cash pooling: an interesting tool for treasury management in large groups

Cash pooling is a must for companies with several subsidiaries. There are two main cash pooling methods: physical cash pooling and notional cash pooling.

What is cash pooling?

Cash pooling is a centralized treasury management method that enables the treasury balances of all a group’s legal entities to be optimized.

The principle is to centralize treasury at the level of the holding company, or parent company, and redistribute it according to the needs of each entity. The subsidiaries transfer their credit balance to the holding company’s centralizing bank account, in what is known as an “upstream” movement. And if the balance of one of the subsidiaries is in debit, the holding company provides it with the liquidities it needs to balance its treasury position, the financial flow will be “downstream”.

It is indeed possible that some group entities may find themselves in a treasury deficit and have to resort to short-term financing, even though the group’s overall financial health is good. In this case, cash pooling helps subsidiaries in difficulty, and limits the need for bank loans.

Pratique cashpooling

Physical cash pooling and notional cash pooling: what's the difference?

There are two main cash pooling techniques:

1. Physical cash pooling

Physical cash pooling involves actual treasury movements between the centralizing account and the subsidiaries’ accounts. It includes different methods:

  • ZBA cash pooling, for Zero Balancing Account, which involves resetting balances to zero on a daily basis.
  • TBA cash pooling, for Target Balancing Account, which aims to level out accounts when their credit balance exceeds a specific threshold, called minimum balance. Below this threshold, funds are not centralized. Debit balances are reset to zero.
  • FBA cash pooling, for Fork Balancing Account, which aims to balance all credit and debit balances when they are respectively above or below a specific threshold.

Centralization can be either manual: the company initiates treasury transfers from a treasury management software (internal cash pooling); or automatic: the bank automatically balances the accounts.

2. Notional cash pooling

Notional cash pooling simplifies the management of group companies’ bank accounts by centralizing them without any physical transfer of funds. This is why notional cash pooling is also called “interest scale merging”: bank accounts are not actually merged into a single account, but interest rates are applied to the sum of the balances of these accounts, thus reducing bank charges.

Some multinationals opt for a combination of the two methods, known as hybrid cash pooling.

Cashpooling groupe

Why introduce cash pooling in your group?

Cash pooling offers many advantages for large companies:

  • A better management of each company’s cash requirements and surpluses: cash pooling ensures optimized management of treasury flows within the group. By making calls for funds or transfers according to the cash available in each subsidiary, it enables a more precise allocation of financial resources.
  • A better self-financing and a reduction in loan recourse: the centralization of cash within the group facilitates its use where it is needed, thus reducing the need for external financing.
  • A reduction in banking costs related to overdrafts: by balancing liquidities within the group, cash pooling helps to avoid overdraft situations in certain companies, thus reducing bank charges associated with interest scales.
  • More advantageous bank interest rates for investments and financing: thanks to centralized cash management and higher treasury volumes, companies can benefit from more favorable interest rates for both their investments and financing needs.

Although cash pooling offers many advantages, it also has some disadvantages that are crucial to consider:

  • Loss of autonomy for subsidiaries: subsidiaries may lose control over the management of their liquidities, limiting their ability to operate independently.
  • Legal and tax constraints: In some countries, legal or tax obstacles may make it difficult or impossible to implement cash pooling.
  • Complexity of implementation: Implementing the system may be long and complex, requiring a delicate navigation through a variety of regulations.

Manage your cash pooling with Allmybanks

If you have set up automatic cash pooling with your bank, the Allmybanks software can automatically generate cash pooling entries in intercompany accounts. The processing is carried out using information entered by the bank in the transaction description.

And if you have set up notional cash pooling with your bank, Allmybanks enables you to calculate the merged scales of the “virtual” centralization group and check the charges levied by your bank.

If you have not set up a bank cash pooling, Allmybanks enables you to set up an assisted cash pool: you can trigger balancing transfers via a wizard with pre-set rules (ZBA – Zero Balancing Account or TBA – Target Balancing Account). Balancing transfers triggered in this way are transmitted to the bank, then automatically transcribed to the intercompany accounts. Another advantage is that you can cash-pool accounts from different banks.

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