Cash Pooling: How to Maximise Your Company’s Cash Flow

Cash Pooling: How to Maximise Your Company's Cash Flow

In order to keep your business running smoothly, it is important to have a healthy cash flow. One way to maximise your company’s cash flow is through cash pooling. This process allows businesses to combine their cash reserves in order to make the most of their liquidity. This article will discuss how cash pooling works and how you can benefit from it!

What is cash pooling?

Cash pooling is a process where businesses combine their cash reserves in order to make the most of their liquidity. This can be done by either depositing cash into a shared account or by lending money to another business. The main benefit of cash pooling is that it allows companies to access more cash when needed. For example, if one business in the cash pool needs cash to make a large purchase, it can borrow money from another business in the pool. “Pools are normally administered by either a treasury company or in-house bank (for larger groups, also providing a range of treasury activities) or a group finance company (for smaller groups, with activities normally limited to cash pooling and longer-term funding).” – Treasury Dragons.

How does cash pooling work?

There are two main types of cash pooling: Physical cash pooling and Notional cash pooling.

Physical cash pool

Physical cash pooling is a process whereby companies consolidate their cash balances at a central location to optimise their cash management. The businesses then have access to this central account when they need cash. Cash pooling can improve a company’s liquidity position, reduce borrowing costs, and minimise exposure to foreign exchange risk. Physical cash pooling arrangements are typically structured as either intraday credit facilities or overnight loans.

Intraday credit facilities are typically used by companies with large, regular cash inflows and outflows. By consolidating their cash balances at a central location, companies can reduce the need for multiple bank accounts and minimise their exposure to overdraft fees.

Overnight loans are typically used by companies that have more stable cash flows. By consolidating their cash balances at a central location, companies can reduce the need for multiple bank accounts and minimise their exposure to foreign exchange risk.

Notional cash pool

“Notional pooling is a cash concentration system that allows cash to remain under local control, but which is recorded at the bank as though the cash has been centralised. If a bank offers notional pooling, it simply combines the ending balances in all of a company’s accounts to arrive at an aggregate net balance.” – AccountingTools. This balance is then used to offset balances in other group companies’ accounts, thereby reducing the total amount of cash that the company needs to hold. Notional pooling allows a company to maintain control of its local cash while still enjoying the benefits of a centralised cash management system.

There are two types of notional pooling: intra-group and inter-group.
Intra-company cash pools involve businesses that are owned by the same parent company.
Inter-company cash pools involve businesses that are not owned by the same parent company.

In both types of cash pooling, the businesses involved combine their cash reserves into one account. The companies then have access to this shared account when they need cash.

Notional pooling can be either cross-currency or local currency.
Cross-currency notional pooling offsets balances in different currencies, while local currency notional pooling only offsets balances in the same currency.

Whichever approach is used, it’s essential to have clear guidelines in place for how the pool will be managed. These guidelines should be reviewed regularly to ensure that they are still appropriate.

There are several benefits of cash pooling, including:

  • Increased liquidity: Cash pooling allows businesses to access more cash when needed. This can be helpful in situations where a business needs to make a large purchase or invest in new equipment.
  • Reduced borrowing costs: When businesses borrow money from a bank, they typically have to pay interest on the loan. However, businesses usually only have to pay a small fee when they borrow money from a cash pool. This can save companies a significant amount of money over time.
  • Improved financial planning: Cash pooling can help businesses better manage their finances. By having access to more cash, companies can plan for future expenses and make investments that will improve their long-term financial health.

When managing cash pools, treasury and finance managers face unique challenges. On the one hand, they need to ensure that the pool is sufficiently funded to meet its obligations. On the other hand, they need to minimise the cost of borrowing for the pool. Cash pools can be a great way to manage cash flow and reduce borrowing costs. However, it’s important to carefully consider the best way to manage them. With a little bit of planning, you can ensure that your cash pool is both effective and efficient.

There are a few things to keep in mind when considering cash pooling. First, businesses should ensure they understand the fees associated with cash pooling. Second, companies should consider whether they have the internal controls to manage a shared account. If you are interested in maximising your company’s cash flow, then cash pooling may be a good option for you. For more information on how to get started, please contact us at www.fennech.com. We would be happy to discuss this topic with you in further detail!

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