In cash pooling, companies have a choice between using their bank partner or relying on the functionalities of their treasury management system (TMS) to manually (or semi-manually) manage their deposits. Redbridge reviews the advantages and disadvantages of each solution.

There are many reasons to implement cash pooling: the desire to pool the group’s cash at a single point, the desire to secure the cash of a subsidiary located in a country at risk, the need to promote intra-group financing, or even the objective of improving the visibility of available cash to invest surpluses in a central location, etc.

Regardless of the reasons, when pooling their cash, companies have a choice between using their bank partner or relying on the functionalities of their treasury management system (TMS) to manually (or semi-manually) manage their deposits. No solution is necessarily superior to another. The choice between bank cash pooling and internal cash pooling depends first on the group’s organization, the level of autonomy given to each operational entity, and the scope over which the treasury tool is deployed. In fact, internal cash pooling is not a viable option if the TMS is not already deployed across a number of subsidiaries and large bank accounts.

Bank cash pooling, the automated solution

To simplify, bank cash pooling can be adapted to all types of companies, from the smallest and least structured to the largest international groups seeking to benefit from the high value-added services offered by banks in this area. In all cases, bank cash pooling is suitable for groups that still lack a robust TMS deployed over a broad scope, but that operate primarily with basic treasury management tools or Web Banking, which vary by region.

Moreover, bank cash pooling is generally applied to a single-bank and single-currency scope. In most cases, a group seeking to pool all its cash will set up as many cash pools as it has currencies and banks. Multi-bank cash pools are clearly possible, but they are not the simplest nor the least expensive, since they require Swift agreements signed by the participating banks. On the other hand, multi-currency cash pools are possible only in the “fictitious” sense, with the implementation of “notional” cash pooling.

Each evening, the pooling bank records the positions of the participating or secondary accounts after the day’s movements, then performs an automated netting of these accounts into a main account. Most of the time, the accounts are zeroed out, but a partial emptying is possible, leaving a target balance. The cash pool configuration is completely outsourced to the bank. Although it saves value days in the case of a single-bank cash pool, the mechanism is somewhat inflexible. Dynamic management of netting frequencies and thresholds is difficult to envision. The possibilities of change are most often limited to the addition or removal of an account. Finally, users may have the unpleasant experience of a blocked flow of payments to the secondary accounts if the intra-day limit allocated by the bank is reached. Good cash forecast management is therefore crucial in this type of organization.

Overall, assigning management of a cash pool to a bank partner offers the advantage of dedicating only a few internal resources to it. The operation means signing a treasury agreement to clarify the lending-borrowing relationship between the participating entities and signing a cash pooling agreement with the bank.

The cost of bank cash pooling is generally proportional to the number of participating accounts and is negotiated with each bank. The implementation of cash pooling therefore implies prior consideration of its banking structure. It is necessary to rationalize banking relationships and the number of accounts in order to optimize the functioning and cost of cash pooling. It is also crucial to ensure that domestic and international transfers among the accounts of a single banking group are indeed included in the cost of the cash pooling.

Internal cash pooling, the choice of flexibility

Internal cash pooling, in contrast, is often favored by structured, centralized groups accustomed to managing their treasury, investments or payments centrally. This solution is particularly adapted to groups with a large number of accounts and customized treasury software. Its cost is proportional to the number of transfers made and its implementation can be rapid, depending on the tool used.

Internal cash pooling is characterized by its high degree of flexibility provided that its treasury tool is correctly configured. Most often, groups that have opted for internal cash pooling limit their use to daily manual netting transfers. But it is also possible to predefine the management rules in the TMS, thus automating the cash pooling operation. This method of functioning affords tremendous flexibility, specifically with the possibility of changing the scope of the cash pooling and its corresponding rules at any time. The treasurer remains in control, with the possibility of blocking funds transfers at any time, unlike automated cash pooling operated by a bank. Internal cash pooling is primarily deployed with a multi-bank and multi-currency scope.

The bank cost of internal cash pooling corresponds primarily to the cost of treasury transfers. These costs can be very high, particularly those costs related to international treasury transfers. Negotiations with each banking partner are therefore necessary.

Internal cash pooling also implies dedicating resources to configure the cash management system, with or without assistance. In principle, the tool recovers the MT940 account statements with transactions from the previous day and prepares the netting transfers according to the parameterized rules. Netting activities are only partially automated. In fact, the TMS offers netting items that must then be validated and sent to the bank according to the validation and sign-off workflow implemented by the group. Unlike the case of a bank cash pool, where subsidiaries sign a cash pooling to the agent in the context of internal cash pooling, the central treasury must have a bank power of attorney for all local accounts if it wants autonomy in managing its organization.

In conclusion, it is not possible to copy a cash pooling solution already implemented in another group. The adoption of cash pooling requires the completion of an audit and an in-depth analysis before selecting a solution. Moreover, in the context of international cash pooling, it is important to be assisted in resolving the tax and regulatory issues related to the pool desired. In terms of price, both solutions are worthwhile, provided the price of the cash transfers and bank cash pooling have been properly negotiated. Moreover, the two solutions are not mutually exclusive; it is completely possible to set up hybrid structures, in which accounts belonging to a single banking group are pooled by the bank with pivot accounts managed from the TMS. It should also be noted that bank cash pooling, although less flexible, will nevertheless be valued as a side business in the overall bank-company relationship.

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