Cash pooling is a word used in business to describe the process of combining a company's numerous bank accounts into a single account, or "pool," that is used to manage the company's total cash situation. This enables the business to more readily monitor and manage its cash flow and to benefit from any potential interest income or expense savings.
Types Of Cash Pooling
Zero Balance Account Cash Pooling
All of the company's bank accounts are connected to a central account that is kept at a balance of zero in a ZBA cash pooling arrangement. Any extra funds in the individual accounts are automatically transferred to the central account, and the central account also automatically makes up any deficiencies.
Notional Cash Pooling
The individual accounts in a notional cash pooling arrangement are not physically merged; rather, the account balances are processed as though they were in a single account. The corporation can benefit from any net interest revenue or cost savings because interest is computed on the total amount of the accounts.
Hard Cash Pooling
Individual accounts are physically combined into a single account in a hard cash pooling arrangement. This enables the business to better manage its cash flow and benefit from any potential interest income or expense savings.
Benefits of Cash-Pooling
In general, the benefits of cash pooling can be summarized as:
- Improved cash flow management: A corporation can centralize and combine all of its bank accounts through cash pooling, making it simpler to monitor and manage the flow of cash. This can assist the business in making more educated choices about how to manage its liquidity and deploy its cash resources.
- Increased interest income: Excess funds in several accounts may be automatically moved to a central account where they might receive interest in a cash pooling arrangement. This could aid the business in boosting interest revenue overall and strengthening its bottom line.
- Cost savings: By eliminating the need for several bank accounts and the related costs and fees, cash pooling can also help a business save money. Additionally, it may enable the business to bargain with its bank for more advantageous terms, such lower loan interest rates or greater deposit interest rates.
- Greater flexibility: With cash pooling, a business can manage its financial resources with more flexibility because it can quickly transfer money between accounts as needed. Companies who operate in various nations or currencies may find this to be very helpful as it enables them to transfer money quickly and simply to the appropriate location.
- Enhanced visibility: A business can improve insight into its entire cash situation and make better decisions on how to manage its liquidity by combining its different bank accounts into one account.
The Legal Risks of Cash Pooling
In corporate law and bankruptcy law, cash-pools may run into legal issues. Cash pooling in the corporate world carries some expropriation risks for the minority shareholders of the subsidiaries by the parent firm of the group. A subsidiary may experience negative effects from the group due to the fact that, depending on the terms of cash pooling, either a significant portion of its cash flow will be diverted to the parent company or its funds will be lent to another umbrella company, both of which may have an impact on its day-to-day operations.