A cash pool is a system involving several related bank accounts whose balances have been aggregated which helps in optimizing interest paid or interest received and also, improves liquidity management.
In simpler words, cash pooling is a cash management technique adopted by companies holding funds at financial institutions. Also, it allow companies to combine their credit and debit positions in various accounts into one whole account, which later is known as national cash pooling and cash concentration.
Why is cash pooling important?
- Reduces financing costs on group level
- Improves investment return due to economies scale
- Simplifies liquidity management on local level
- Centralization reduces external banking costs
- Coordination of financing cycles optimizes cash flow forecast.
Effective ways to cash pool:
1. Physical Pooling/cash Concentration: It helps in controlling the funds centrally. That is, this method puts up a one whole account representing all the credit and debit accounts present in the financial institutions. It helps in better controlling on the cash flow. One more key factor as to why implement this strategy is; it reduces credit facility requirements. The treasury has high level of visibility over the balances of subsidiaries’ accounts in this type of agreement and can thus control the disbursement of cash.
2. National Pooling: By implementing this way to cash pool, we can enjoy several important benefits like;
- Subsidiaries help in maintaining the autonomy.
- As balances remain with each legal entity, national pooling requires far less administration than physical pooling.
- National pooling incurs far lower fees than physical pooling as the bank operating the pool is not required to transfer cash between accounts.
3. Single Legal Account Pooling: A form of cash concentration, in this arrangement a company maintains only a master account with a bank. This master account contains all the company’s cash and is generally managed by the group treasury.
4. Reference Account Structures: Balance son the local operating accounts are manually or automatically transferred to the subsidiary’s reference account in the central pooling location. These balances will then be nationally pooled, allowing for the full offset of credit and debit balances.
5. Multicurrency Pooling: It allows companies to achieve interest savings without requiring them to swap their offset positions in the foreign exchange market first.